Abstract

https://ssrn.com/abstract=2812587
 


 



Shariah-Compliant Equity Portfolios: The Weighting Method Matters


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)

July 21, 2016


Abstract:     
Market capitalization weights tend to outweigh overpriced stocks, and therefore lead to implicit bets, which are inconsistent with the primary objectives of Shariah-compliant equity investing. As an alternative to the standard market capitalization weighting, we show how Shariah-compliant equity portfolios can be constructed using fundamental value accounting variable-based portfolio weights, equal weights and weights that are optimized to achieve a low portfolio risk. 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.

Number of Pages in PDF File: 25

Keywords: Shariah equity portfolio, Market capitalization, Fundamental weighting, Equal weighting, Low risk weighting

JEL Classification: G11


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Date posted: July 22, 2016 ; Last revised: December 21, 2016

Suggested Citation

Boudt, Kris and Raza, Muhammad Wajid and Wauters, Marjan, Shariah-Compliant Equity Portfolios: The Weighting Method Matters (July 21, 2016). Available at SSRN: https://ssrn.com/abstract=2812587

Contact Information

Kris Boudt (Contact Author)
Vrije Universiteit Brussel (VUB) ( email )
Pleinlaan 2
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
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
Brussels, 1050
Belgium
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