Shariah-compliant Capital Asset Pricing Model: new mathematical modeling

Abstract

The main objective of our paper is to propose a novel approach in pricing Islamic financial assets in accordance with shariah , advocated by contemporary investment theories of Markowitz’s Mean–Variance Analysis and CAPM. The shariah -compliant Capital Asset Pricing Model that we developed with a few changing’s of the traditional Capital Asset Pricing Model is integrating zakat , purification of return and exclusion of short sales. Then, we utilize a sample composed of 10 shariah -compliant public-listed companies in Bursa Malaysia. The empirical results find that the proposed Islamic CAPM is appropriate and applicable in investigating the linkage among risk and return in the Islamic stock market. Our investigation contributes to existing body of knowledge by presenting an algorithm and mathematical modeling of the shariah -compliant CAPM which has been lacking in the literature of Islamic finance.