Evaluating the Shariah-compliance of equity portfolios: The weighting method matters

Kris Boudt, Muhammad Wajid Raza, Marjan Wauters

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The choice of weighting method in constructing an equity portfolio affects not only the financial performance, but also its Shariah-compliance. We show how the implicit bets in market capitalization, fundamental value, equal and low risk weights can affect the individual's perception of Shariah compliance of the financial portfolio. For the universe of Shariah-compliant S&P 500 stocks over the period 1986–2014, we find that the risk-adjusted performance is improved when using the alternative weighting methods compared with the traditional use of market capitalization weighting. The choice of weighting method matters for the Shariah-compliant equity investor, both in terms of compliance with the primary objectives of Shariah investing and in terms of the secondary objective of optimizing the financial performance of the portfolio.

LanguageEnglish
Pages1-31
Number of pages31
JournalInternational Review of Financial Analysis
DOIs
Publication statusAccepted/In press - 2019

Fingerprint

Weighting
Equity
Financial performance
Market capitalization
Investing
Investors
Individual perception
Risk-adjusted performance
Fundamental values

Keywords

  • Equal weighting
  • Fundamental weighting
  • Islamic finance
  • Low risk weighting
  • Market capitalization
  • Shariah-compliant investing

Cite this

@article{fb2b9e0f8d02445f9cf5cfc6b7c7a94d,
title = "Evaluating the Shariah-compliance of equity portfolios: The weighting method matters",
abstract = "The choice of weighting method in constructing an equity portfolio affects not only the financial performance, but also its Shariah-compliance. We show how the implicit bets in market capitalization, fundamental value, equal and low risk weights can affect the individual's perception of Shariah compliance of the financial portfolio. For the universe of Shariah-compliant S&P 500 stocks over the period 1986–2014, we find that the risk-adjusted performance is improved when using the alternative weighting methods compared with the traditional use of market capitalization weighting. The choice of weighting method matters for the Shariah-compliant equity investor, both in terms of compliance with the primary objectives of Shariah investing and in terms of the secondary objective of optimizing the financial performance of the portfolio.",
keywords = "Equal weighting, Fundamental weighting, Islamic finance, Low risk weighting, Market capitalization, Shariah-compliant investing",
author = "Kris Boudt and Raza, {Muhammad Wajid} and Marjan Wauters",
year = "2019",
doi = "10.1016/j.irfa.2017.12.003",
language = "English",
pages = "1--31",
journal = "International Review of Financial Analysis",
issn = "1057-5219",
publisher = "Elsevier Inc.",

}

Evaluating the Shariah-compliance of equity portfolios : The weighting method matters. / Boudt, Kris; Raza, Muhammad Wajid; Wauters, Marjan.

In: International Review of Financial Analysis, 2019, p. 1-31.

Research output: Contribution to JournalArticleAcademicpeer-review

TY - JOUR

T1 - Evaluating the Shariah-compliance of equity portfolios

T2 - International Review of Financial Analysis

AU - Boudt, Kris

AU - Raza, Muhammad Wajid

AU - Wauters, Marjan

PY - 2019

Y1 - 2019

N2 - The choice of weighting method in constructing an equity portfolio affects not only the financial performance, but also its Shariah-compliance. We show how the implicit bets in market capitalization, fundamental value, equal and low risk weights can affect the individual's perception of Shariah compliance of the financial portfolio. For the universe of Shariah-compliant S&P 500 stocks over the period 1986–2014, we find that the risk-adjusted performance is improved when using the alternative weighting methods compared with the traditional use of market capitalization weighting. The choice of weighting method matters for the Shariah-compliant equity investor, both in terms of compliance with the primary objectives of Shariah investing and in terms of the secondary objective of optimizing the financial performance of the portfolio.

AB - The choice of weighting method in constructing an equity portfolio affects not only the financial performance, but also its Shariah-compliance. We show how the implicit bets in market capitalization, fundamental value, equal and low risk weights can affect the individual's perception of Shariah compliance of the financial portfolio. For the universe of Shariah-compliant S&P 500 stocks over the period 1986–2014, we find that the risk-adjusted performance is improved when using the alternative weighting methods compared with the traditional use of market capitalization weighting. The choice of weighting method matters for the Shariah-compliant equity investor, both in terms of compliance with the primary objectives of Shariah investing and in terms of the secondary objective of optimizing the financial performance of the portfolio.

KW - Equal weighting

KW - Fundamental weighting

KW - Islamic finance

KW - Low risk weighting

KW - Market capitalization

KW - Shariah-compliant investing

UR - http://www.scopus.com/inward/record.url?scp=85044625730&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85044625730&partnerID=8YFLogxK

U2 - 10.1016/j.irfa.2017.12.003

DO - 10.1016/j.irfa.2017.12.003

M3 - Article

SP - 1

EP - 31

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

ER -