Gold and portfolio diversification: A stochastic dominance analysis of the Dow Jones Islamic indices

This study examines the role of gold in diversification of eight Dow Jones Islamic stock index portfolios from 1996 to 2017. Using stochastic dominance (SD) approach, it tests the null hypothesis that gold-Islamic stock portfolio return does not dominate (outperform) non-gold Islamic stock portfolio return. The results show that a gold-Islamic stock portfolio stochastically dominates one without gold at the FSD, SSD, and TSD orders in all Islamic stock indices. Moreover, the level of SD order increases when we add more gold to the portfolio. We find that the SD order is manifest during the financial crisis (2007-2009) at all percentage holdings of gold. This indicates that risk-averse investors in Islamic stock indices should include gold in their portfolios to maximize their expected utilities. Furthermore, the results of mean variance (MV) analysis are consistent with the ones of SD. Our findings suggest that investors may design appropriate investments with gold to diversify their Islamic stock portfolios.