Fewer Reasons to Sin: A Five-Factor Investigation of Vice Stocks

This paper investigates the return performance of a portfolio of U.S. “vice stocks,” firms that manufacture and sell products such as alcohol, tobacco, gaming services and national defense. In my research, I examine a portfolio of sixty one vice stocks over the period 1996 to 2016. Using daily return data, I compute the Jensen’s alpha (CAPM), Fama-French Three Factor, Carhart FourFactor, and Fama-French Five-Factor results for the complete vice portfolio, and each vice industry individually. Results from the CAPM, Fama-French Three Factor Model, and the Carhart FourFactor Model show a positive and significant alpha for the vice portfolio throughout the sample period. However, the alpha’s significance disappears with the addition of the explanatory variables from the Fama-French Five-Factor Model. Further, after controlling for the Five-Factor model variables, the significance of the alpha disappears in the vice industry returns. However, the alpha maintains its significance during a bull market subsample.