Islamic vs conventional equities in a strategic asset allocation framework

This paper extends the existing literature by analysing the performance of Islamic vs conventional equities in a strategic asset allocation framework. I consider two types of investors: a faith-based investor and a conventional investor. The faith-based investor invests in shariah complaint equities only and excludes conventional equities from the asset menu. The conventional investor's asset menu comprises of both Islamic and conventional equities. The findings show that on a standalone basis Islamic equities exhibit both short-run and long-run desirable attributes for the faith-based investor. However, the results for the conventional investor show that the inclusion of conventional equities in the asset menu reduces the desirability of Islamic equities for short-run only. Thus, conventional equities are more desirable for long-run investors. The results are consistent for various levels of risk aversion. Another important finding is that exclusion of conventional equities from the asset menu of faith based investor results in substantial welfare losses. (C) 2015 Elsevier B.V. All rights reserved.