Abstract
Heuristics based low volatility portfolio construction is a straightforward investment strategy that could be implemented by retail investors in the stock market. This study examines the performance of low volatility portfolio for Shariah and conventional stock portfolios. Specifically, this study back tests the profitability of low volatility portfolio using 15 Shariah and conventional stocks that are listed on Bursa Malaysia using data from January 2014 until December 2018. Combination of large, mid, and small capital firms are included in the study to highlight the difference in portfolio concentration within firm size classification. The results show that, the return of conventional portfolio and shariah compliant portfolio is not statistically different. However, the risk in shariah compliant portfolio is statistically higher than the conventional portfolio. Both portfolios give better annualized return and holding period return than their respective benchmark. Thus, retail investor could take advantage of the strategy to generate abnormal return. For investors that focus on shariah compliant investment only, even though the portfolio has slightly higher risk than the conventional counterpart, this strategy is still worth considering. However, it is advisable for investor to monitor portfolio risk regularly to avoid excessive risk taking and to include more shariah compliant large cap stocks in the portfolio.
Highlights
Malaysian stock market has witnessed a steady rise on the participation of retail investors in stock trading especially among the millennials
Heuristics based low volatility portfolio construction is a straightforward investment strategy that could be implemented by retail investors in the stock market
This study examines the performance of low volatility portfolio for Shariah and conventional stock portfolios
Summary
Malaysian stock market has witnessed a steady rise on the participation of retail investors in stock trading especially among the millennials. In 2016, there is a 36% jump in the number of Central Depository System (CDS) opened by people with age 25 years and below in Malaysian capital market (Aruna, 2017). This trend is still continuing in 2019 as more than 40% of CDS accounts were opened by the youngsters (Ooi, 2019). Due to various economics and political challenges that has been faced by Malaysia in recent years, stock investors especially those with limited trading experience need to equip themselves with the appropriate knowledge especially in managing their stock portfolios. More research and study on stock investment that focuses on retail investors is crucially needed
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