Evaluating the Shariah-Compliance of Equity Portfolios: The Weighting Method Matters

28 Pages Posted: 22 Jul 2016 Last revised: 15 Jul 2017

Kris Boudt

Vrije Universiteit Brussel (VUB); VU University Amsterdam

Muhammad Wajid Raza

Vrije Universiteit Brussel (VUB); Shaheed Benazir Bhutto University

Marjan Wauters

KU Leuven - Faculty of Business and Economics (FEB); Vrije Universiteit Brussel (VUB)

Date Written: March 5, 2017

Abstract

The choice of weighting method in constructing equity portfolio affects not only the financial performance, but also its Shariah-compliance. We show how the implicit bets in market capitalization weights, fundamental value weights, equal weights 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 thus 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: Shariah equity portfolio, Market capitalization, Fundamental weighting, Equal weighting, Low risk weighting

JEL Classification: G11

Suggested Citation

Boudt, Kris and Raza, Muhammad Wajid and Wauters, Marjan, Evaluating the Shariah-Compliance of Equity Portfolios: The Weighting Method Matters (March 5, 2017). Available at SSRN: https://ssrn.com/abstract=2812587

Kris Boudt (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Muhammad Wajid Raza

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Shaheed Benazir Bhutto University ( email )

Sheringal
Dir, Khyber Pakhtunkhwa
Pakistan

Marjan Wauters

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Korte Nieuwstraat 33
Antwerpen, B-3000
Belgium

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

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