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

Kris Boudt; Muhammad Wajid Raza; Marjan Wauters

doi:10.1016/j.irfa.2017.12.003

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

Kris Boudt, Muhammad Wajid Raza^*, Marjan Wauters

^*Corresponding author for this work

Research output: Contribution to Journal › Article › Academic › peer-review

324 Downloads (Pure)

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.

Original language	English
Pages (from-to)	406-417
Number of pages	12
Journal	International Review of Financial Analysis
Volume	63
Early online date	13 Dec 2017
DOIs	https://doi.org/10.1016/j.irfa.2017.12.003
Publication status	Published - May 2019

Funding

We are grateful to the Editor (Sabri Boubaker), two anonymous referees, Özgur Arslan, Dawood Ashraf, Jean-Charles Garibal, Bertrand Maillet, Pierre-Guillaume Méon, Valeri Zakamouline and participants at various seminars and conferences for useful comments. We also like to thank Shaheed Benazir Bhutto University, Dir, Pakistan and the Higher Education Commission, Pakistan for providing financial support. The comments, opinions, and views expressed in this paper, do not necessarily reflect those of the members, directors and officers of the Financial Services and Markets Authority.☆ We are grateful to the Editor (Sabri Boubaker), two anonymous referees, Özgur Arslan, Dawood Ashraf, Jean-Charles Garibal, Bertrand Maillet, Pierre-Guillaume Méon, Valeri Zakamouline and participants at various seminars and conferences for useful comments. We also like to thank Shaheed Benazir Bhutto University, Dir, Pakistan and the Higher Education Commission, Pakistan for providing financial support. The comments, opinions, and views expressed in this paper, do not necessarily reflect those of the members, directors and officers of the Financial Services and Markets Authority.

Funders	Funder number
Shaheed Benazir Bhutto University
Higher Education Commission, Pakistan

Keywords

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

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1016/j.irfa.2017.12.003

Evaluating the Shariahcompliance of equity portfolios_The weighting method mattersFinal published version, 448 KBLicence: Article 25fa Dutch Copyright Act

Persistent URL (handle)

Copy link address

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",

month = may,

doi = "10.1016/j.irfa.2017.12.003",

language = "English",

volume = "63",

pages = "406--417",

journal = "International Review of Financial Analysis",

issn = "1057-5219",

publisher = "Elsevier Inc.",

}

TY - JOUR

T1 - Evaluating the Shariah-compliance of equity portfolios

T2 - The weighting method matters

AU - Boudt, Kris

AU - Raza, Muhammad Wajid

AU - Wauters, Marjan

PY - 2019/5

Y1 - 2019/5

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

SN - 1057-5219

VL - 63

SP - 406

EP - 417

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

ER -

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

Abstract

Funding

Keywords

UN SDGs

Access to Document

Persistent URL (handle)

Other files and links

Cite this