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Index funds and diversification in Saudi Arabia

Author

Listed:
  • Hicham Benjelloun
  • Abdulkader M.A. Abdullah

Abstract

Purpose - The purpose of this paper is to investigate how best to diversify in Saudi Arabia's stock market. Design/methodology/approach - The analysis proceeds as follows: first, repeated sampling with replacement from a sample of 62 actual companies' monthly stock returns from January 2001 to June 2006 is used to simulate the performance of various portfolio sizes; second, a modified Statman diversification model is used to evaluate the performance of index funds in Saudi Arabia and thus assess the size of a diversified portfolio. Findings - This paper reaches two important findings: first, due to high index funds fees, investors are better off diversifying by purchasing stocks directly from the stock market; second, a portfolio containing five randomly chosen stocks is sufficient to achieve diversification. Originality/value - This paper provides useful recommendations on how to achieve diversification. Additionally, it highlights the fact that index funds are too expensive to be useful in Saudi Arabia.

Suggested Citation

  • Hicham Benjelloun & Abdulkader M.A. Abdullah, 2009. "Index funds and diversification in Saudi Arabia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 2(3), pages 201-212, August.
    • Handle: RePEc:eme:imefmp:v:2:y:2009:i:3:p:201-212
    DOI: 10.1108/17538390910986335
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