Question

outline the challenges in evaluating and comparing the performance of sin stocks with ethical stocks. consider the importnace of abnormal returns

Answer 1

Sin stocks belong to the companies which are engaged in activities which are considered undesirable from social point of view. Some of these stocks are military equipment stock such as Northrop Grumman or tobacco stocks. However, at the same time, such stocks are also more likely to outperform and provide higher abnormal return in comparison to ethical stocks. This is generally due to the premium required to compensate for the reputational risk of the stock. The higher return is also required to compensate for litigation risk. All these risks lead to such sin stocks providing higher and abnormal returns.