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Is there a diversification “cost” of Shari’ah compliance? Empirical evidence from Malaysian equities

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  • Kamil, Nazrol K.M.
  • Bacha, Obiyathulla I.
  • Masih, Mansur

Abstract

Islamic equity portfolios work with a smaller investment universe given the filtering of non-Shari’ah compliant stocks. It has been theoretically argued that this culminates in suboptimal portfolio diversification, which in turn adversely affects risk-adjusted returns. We offer empirical evidence that such a conceived portfolio diversification “penalty” is far from a foregone conclusion, at least empirically. Our results tend to indicate that Islamic portfolios are not invariably handicapped in terms of portfolio diversification. We also explored dimensions that may account for differences in the relative investment performance between Islamic and conventional portfolios, such as portfolio constraints, short selling and market conditions. We believe this paper is among the first to apply substantial empirical analysis specifically with respect to the portfolio diversification perspective on Islamic equity investments.

Suggested Citation

  • Kamil, Nazrol K.M. & Bacha, Obiyathulla I. & Masih, Mansur, 2021. "Is there a diversification “cost” of Shari’ah compliance? Empirical evidence from Malaysian equities," Economic Systems, Elsevier, vol. 45(1).
    • Handle: RePEc:eee:ecosys:v:45:y:2021:i:1:s0939362518304217
    DOI: 10.1016/j.ecosys.2020.100817
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    Cited by:

    1. Abdelkader Derbali & Abderrazek El Khaldi & Fathi Jouini, 2017. "Shariah-compliant Capital Asset Pricing Model: new mathematical modeling," Journal of Asset Management, Palgrave Macmillan, vol. 18(7), pages 527-537, December.

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    More about this item

    Keywords

    Islamic equity portfolio; Portfolio diversification; Islamic mutual funds; Analysis of covariance (ANCOVA); Efficient frontier; Maximum sharpe ratio;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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