TY - JOUR T1 - Forming ESG-Oriented Portfolios: A Popularity Approach JF - The Journal of Investing SP - 63 LP - 75 DO - 10.3905/joi.2022.31.4.063 VL - 31 IS - 4 AU - Thomas M. Idzorek AU - Paul D. Kaplan Y1 - 2022/05/20 UR - https://pm-research.com/content/31/4/63.abstract N2 - Key theories of financial economics seem to be at odds with one another and with observed personalized portfolios. The Popularity Asset Pricing Model serves as a unifying theory by allowing for both rational and irrational investors, individual risk and return expectations, a multitude of pecuniary and non-pecuniary characteristics to impact asset prices, and investors to derive utility from non-pecuniary characteristics. The authors develop a benchmark-relative fund-of-funds alpha-tracking error utility function that directly incorporates an investor’s non-pecuniary preferences, including environmental, social, and governance–oriented preferences. Maximizing the utility function leads to a personalized portfolio that tilt toward characteristics that the investor likes and away from characteristics the investor dislikes while maximizing alpha and minimizing tracking error. ER -