MF 36,10 876 Managerial Finance Vol. 36 No. 10, 2010 pp. 876-885 # Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074351011070242 Faith-based and sin portfolios An empirical inquiry into norm-neglect vs norm-conforming investor behavior Daniel Perez Liston and Go ¨kc ¸e Soydemir University of Texas-Pan American, Edinburg, Texas, USA Abstract Purpose – The purpose of this paper is to investigate relative portfolio performance between sin stock returns and faith-based returns. Design/methodology/approach – Similar to Hong and Kacperczyk, Jensen’s alpha was utilized to conduct tests along with three asset-pricing models and rolling regression technique to reveal that faith-based and sin betas move in opposite directions during most of the sample period. Findings – Norm-neglect was found, in that Jensen’s alpha is positive and significant for the sin portfolio. Further, evidence in favor of norm-conforming investor behavior was found, where Jensen’s alpha is negative and significant for the faith-based portfolio. These findings provide evidence that the sin portfolio outperforms the faith-based portfolio relative to the market. A rolling regression technique reveals that faith-based and sin betas tend to move in opposite directions during most of the sample period. The evidence suggests that faith-based beta has an average estimated beta of one, mimicking the market. The sin portfolio, however, has an average estimated beta of one-half. Finally, the reward-to-risk measure, Sharpe ratio, is statistically higher for the sin portfolio relative to the faith-based portfolio. Originality/value – This paper contributes to the literature in the following distinct ways. First, three asset-pricing models are estimated to examine Jensen’s alpha for sin and faith-based portfolios. Second, a rolling regression procedure is used to examine the dynamic behavior relative to the market of the sin and faith-based portfolios. Third, use is made of the Jobson and Korkie test, which allows for statistical comparisons of Sharpe ratios. Lastly, daily instead of monthly data and a different sample period are used to examine the research questions posed in this study. Keywords Financial management, Asset valuation, Investors, Portfolio investment Paper type Research paper I. Introduction Using religious screens, faith-based portfolios restrict the investable universe. The practical importance of researching such portfolios is underscored by the growth in total assets under management by faith-based funds. For example, total assets have grown significantly from less than $500 million 11 years ago, to over $31 billion in 2010. Contrary to faith-based, sin portfolios restrict the investable universe by using impious screens. Due to good financial performance, the relevance of sin portfolios has also grown recently. Their respectable financial performance has been acknowledged by the popular press and investment advisors. For example, from 2002 to 2009, the Vice Fund had an annualized return of 43 percent, compared to 15 percent for the S&P 500 over the same interval. This increased demand by investors for faith-based and sin portfolios makes them viable candidates for further investigation. Despite the rising trend of faith-based investments and the strong performance of sin stocks, the current state of the sin and faith-based literature leaves several questions unanswered. Specifically, it is not certain whether following social norms or neglecting them results in higher or lower risk-adjusted returns. Similarly, there appears little evidence on how betas of faith-based and sin portfolios behave over time. The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307-4358.htm JEL codes – G12, G14