Can Naughty Be Nice for Investors: A Multifactor Examination of Vice Stocks

This article examines the return characteristics of a portfolio of U.S. “vice stocks,” those of firms that manufacture and sell socially irresponsible products such as alcohol, tobacco, gaming and national defense services. First of all, I construct a portfolio using the daily returns of forty one vice stocks over the period from October 2007 to October 2013 and find the Jensen’s alpha (CAPM), Fama-French three factor and Carhart four-factor results for the entire portfolio, the entire portfolio during bear and bull markets, and each vice industry individually. Full-period results show a positive, yet insignificant alpha for the entire portfolio and each vice industry. Bear market results show a positive and significant alpha for the entire portfolio as well as for all industry portfolios except the tobacco industry. Bull market results for the portfolio are less conclusive with an alpha significant only in the three and four-factor models.