Islamic Investment and the Cost of Observance

Abstract

There is no overriding reason why restrictions on investment choice imposed by religious or social interest must necessarily disadvantage those who adhere to them provided that there is sufficient diversity in the choices that remain. We examine this issue empirically with a sample of over 1,000 risk-matched Secular and Islamic-compliant portfolios comprised of S&P 500 stocks and find that the expected cost of observing Islamic investment principles is positive. And while returns shift sharply in favor of Islamic portfolios out-of-sample, a considerably larger fraction of the Secular portfolios that had been identified as dominant in the estimation period continue to outperform.