Efficient Diversification with Shariah-Compliant Stocks: Evidence from the South-East European Capital Markets

  • Azra ZaimovićEmail author
  • Almira Arnaut-Berilo
  • Azra Osmanbegović


Diversification possibilities enable investors to manage portfolio risk and decrease exposure to it, in order to prevent their portfolios from losing value. Well-diversified portfolio is the one that contains different asset classes with low return’s correlations. Essentially, portfolio investors are looking for optimal portfolio for a set of available assets and a given amount of capital. The difference between conventional and Shariah-compliant portfolio management is the application of industry screening and financial criteria screening. Since Shariah-compliant investing reduces the available asset classes set, it is assumed that diversification possibilities are reduced also. In this paper, we investigate the mean-variance performance of stocks with the highest liquidity from the seven South-East European (SEE) capital markets included in the regional infrastructure platform SEE link, in five years period, from November 2012 till October 2017, with special emphasis to the performance of the Shariah-compliant stocks (SCSs). Markowitz mean-variance (MV) portfolio optimization method based on historical data is used to identify possibilities of diversification among SCSs, all sample stocks, European and regional stock market indices. Shariah-compliant stock screening is performed based on the AAOIFI stock screening criteria. We contribute to the empirical findings of the performance of SCSs by evaluating the efficient portfolios created of SCSs, in comparison with the efficient portfolios created of all sample stock, as well as in comparison with the major stock indices in Europe and in the analyzed SEE capital markets. We create 10,000 portfolios made up of any 2, 3, 8 and 17 stocks, with random weights. Efficient portfolios composed of eight SCSs from the sample dominate over 99.95% of all possible portfolios composed of sample stocks. Our empirical research results show that Shariah-compliant investors do not significantly sacrifice any return for the given level of risk. Further, SEE blue-chip stocks outperform the European stock indices, meaning that the best companies from the South-East European countries could offer significant diversification opportunities to European investors.


Portfolio diversification Mean-variance analysis Shariah-compliant stock South-East Europe Islamic finance 


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Copyright information

© The Author(s) 2020

Authors and Affiliations

  • Azra Zaimović
    • 1
    Email author
  • Almira Arnaut-Berilo
    • 1
  • Azra Osmanbegović
    • 2
  1. 1.School of Economics and BusinessUniversity of SarajevoSarajevoBosnia and Herzegovina
  2. 2.ASA BankaSarajevoBosnia and Herzegovina

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