Title: An Islamic alter ego for Dow Jones Industrial Average portfolio
Authors: Mulazim Ali Khokhar - Vrije Universiteit Brussels (Belgium) [presenting]
Kris Boudt - UGent, VUB, VUA (Belgium)
Dawood Ashraf - Islamic Development Bank Institute (Saudi Arabia)
Abstract: A unique Islamic equity index is developed by using the qualitative and quantitative features extracted from the expert committee decisions about the inclusion/exclusion of stocks in the Dow Jones Industrial Average (DJIA) portfolios, the world's oldest index, using machine learning. While the DJIA is the reference portfolio for conventional investors, it is not acceptable for Islamic investors. Over the past years, more than half of its portfolio was invested in Shariah-incompliant stocks. A naive approach of applying Shariah compliance filters on DJIA portfolios renders unrealistic invested in only around 15 stocks. According to previous work, one needs around 30 stocks to be diversified. A similar problem was observed for the Dow Jones US universe, for which a range of Shariah-compliant portfolios was developed under the flagship of Dow Jones Islamic Market (DJIM) portfolios. Particularly the DJIM-titan 50 index, where the portfolio consists of 50 stocks. It restricts the universe to only the Shariah-compliant top 50 market capitalization stocks in the US and applies market capitalization weighting. Although DJIM-titan 50 portfolio constitutes Shariah-compliant blue-chip companies in the US, it lacks the sophistication in selection criteria and human expert judgement of DJIA expert committee. We intend to create simple rule-based algorithms of DJIA expert committee alter egos and create DJIA style Islamic portfolio and its smart beta alternatives.