Regret aversion, risk appetite, and the sustainability nexus in mean–variance analysis

We investigate the interplay between regret aversion, risk appetite, and sustainability in investors’ mean–variance analyses by incorporating regret aversion and sustainability as decision criteria in both nominal and robust versions of Markowitz’s model of portfolio optimization. We conduct an empirical analysis using data from the US financial market to derive managerial insights. Our findings reveal a U-shaped relationship across regret aversion values and the regret-adjusted portfolio standard deviation for all risk appetites. Moreover, the Sharpe ratio varies inversely with sustainability, increases with rising risk appetite, and follows a concave relationship with regret aversion.