10

In recent years, many investors have chosen ESG (environmental, social and governance) funds in order to steer their wealth into companies whose values accord with their own.

1. Some commentators suggest that ESG funds earn higher average returns than the market overall. Explain whether this is compatible with the predictions of CAPM.

2. ABC is an ESG whose beta is 1.2. Explain how you know that investing all your wealth in ABC is riskier than investing all your wealth in the market portfolio. (Hint: You may find it helpful to use the rewritten definition of beta from Lecture 12)