Background: While working as risk
consultants at Barra in 1990’s, the first two authors decided to start
collaborating on a research project with its first paper titled “Application of
Volatility in Portfolio Construction” . The third author was then a risk
manager of a financial institution which was a client of Barra’s. Bringing his
expertise in portfolio risk management, he joined the research team. Aim: The
core of this paper lies in the construction of an investment portfolio with a
main objective of value appreciation while examining its tracking error -,
a risk measurement with reference to a benchmark  . The authors believe, while
tracking error measurement is a common tool for portfolio risk management, total
risk measurement is more important. The management goal is to minimize
drawbacks using the technique of risk budgeting. These topics will be discussed
in future research papers.
Ethical investments are a now a considerable sector in the investment market, with the Financial Times running the headline “Green and ethical investment comes of age” (Shepherd, ). Claudia Quiroz (lead fund manager for Cheviot Climate Assets Fund) predicts a strong future for ethical investment, with sustainable investment becoming a growing theme (Hoskin ). Much previous research in the “ethical investment” field divides investments into two categories: acceptable or unacceptable. This paper builds on the work of Barracchini and Addessi , in viewing how “ethical” an investment is to be a different dimension—each investment is seen as being on a continuum, from “least ethical” to “most ethical”. This paper takes the work of Barracchini and Addessi  from a theoretical construct to an approach which can be applied by practitioners. In order to make a workable method, this paper uses conventional portfolio analysis (which focus on risk and return), combined with principal components analysis in order to minimize the risk of a portfolio. It adopts a specific functional form for the saver’s utility function, to assess which assets appears most desirable using that person’s values.