Performance Of Shariah Compliant Equity Portfolio Using Model-based Return And Risk Estimation

Establishing optimal allocation for different stocks in a portfolio via modern portfolio theory is highly depended on the accuracy of the return and risk estimation. For retail investors, technological advancement has made it possible for them to apply thecomplex estimation procedure for decision making. Therefore, this study aims to assess the mean-variance Shariah-compliant portfolio performance with model-based return and risk estimation. The methodology adopted is based on the implementation of ARMA and GARCH model, focused on the daily stock prices from the year 2011 until 2018. Further, we used one-step-ahead forecast for the best ARMA-GARCH model as well as an arithmetic mean and variance estimation to prepare the composition of diversified portfolioweights for top 10 constituent companies listed in FBM Hijrah Shariah (FBMHS) Index. We also measure out of sample performance in a constructed portfolio using Sharpe, Treynor and Jensen’s measures. The result shows that the stock allocation for the model-based portfolio is less diversified as compared to the non-model-based portfolio. The composition of the model-based portfolio weight is capable of achieving high annual returns which can compensate for high risk. The out of sample portfolio performance of both techniques is capable to outperform the FBMHS Index.

Keywords:Return Risk Estimation;Shariah-Compliant Portfolio;Model-Based Portfolio;Portfolio Performance