Abstract
The Islamic Capital Market (ICM) has grown rapidly in line with the increasing demand for various Shariah-compliant investment instruments. As the fastest growing investment component, Shariah-compliant stocks in Bursa Malaysia have attracted more attention not only to Muslim investors but also to non-Muslims investors to meet their investment objectives. However, most of the literature focused on the performance comparisons of Islamic and conventional indices. This study contributes to examine the overall performance of Shariah-compliant stocks across sectors which has significant implications into the relationship of risk-return. Therefore, the main objective of this study is to analyse the risk features of 57 Shariah-compliant stocks from 12 sectors from 2013 to 2018. Next, this study also focuses on evaluating the performance of Shariah-compliant at the sector level by using the standard-risk adjusted performance methods towards KLCI. Methods employed were Sharpe, Treynor and Jensen’s Alpha ratios. The empirical results reveal that the unsystematic risk component in Shariah-compliant stocks is very high with an average diversifiability measure of 0.914. The results indicate that all Shariah-compliant stocks are not fully diversified and there are still great opportunities for diversification. While the results show that the Islamic sectors have slightly outperformed the KLCI, it also highlights that application of different risk variables used such as standard deviation and beta will lead to differences in the performance ranking. At best, investors could use this ranking to make investment decisions without undertaking time-consuming analysis to determine the highest and lowest performing sectors in the stock market.
Highlights
In recent years, there is a sharp increase in the demand for Islamic financial products and services in an emerging market, especially in Malaysia
The 3-month Malaysia T-bill rate was employed to proxy for the risk-free rate and the weekly returns of the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) that serve as a proxy for market return
The final ratio employed in this study introduced by Jensen (1968) using the intercept alpha, αi, to evaluate the performance in the Capital Asset Pricing Model (CAPM) Lastly, the following equation is employed to calculate Jensen’s Alpha:
Summary
There is a sharp increase in the demand for Islamic financial products and services in an emerging market, especially in Malaysia. As one of the world's leading Muslim countries, Malaysia has played an important role in promoting a variety of Islamic investments to its Muslim investors. Responding to this requirement, the Malaysian government has taken the initiative to establish the Islamic Banking Act 1983 and the Government Investment Act 1983 as a commitment to boost the local ICM. A business that engages in risk and returns sharing activities as practised by conventional banking or investing in any non-compliance industries related to pork, alcoholic beverages, tobacco, pornography and entertainment has been excluded from the Shariah-compliant securities list, published twice a year by the SAC
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