Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Advantages of Investing in Sharia Financial Instruments Using
Modern Portfolio Theory Approach
Muhammad Rizki Ramadhan1 and Anggoro Budi Nugroho2
Eventhough the capital market in Indonesia has been growing rapidly, the
number of local investors in Indonesia account as the lowest in the region.
While the sharia capital market could be one the solution to increase the
number of local individual investors in the country due to its affiliation with
Islamic law, and also its good performance, the author feels the
information to convince more investors to invest in sharia capital market is
still inadequate. This paper aims to demonstrate further about the
advantages of investing in sharia capital market through risk and return
analysis that will be further elaborated using Markowitz Efficient
Approach. The analysis done through this research shows that the sharia
financial instruments could outperform the more conventional instruments,
proving that they could become solution to increase the number of local
investors in Indonesia.
Keywords: Investment, Sharia Capital Market, Sharia Stocks, Sukuk Negara Ritel.
1. Introduction
Indonesia is one of the countries with largest muslim population in the world, with the data
in 2012 showing 13.1% of world muslim population are coming from Indonesia (Maps of
World, 2012). Due to its huge muslim population, the emergence of Sharia capital market
should be able to attract local investors in Indonesia. The Indonesia government had
established the sharia capital market through Jakarta Islamic Index on July 3, 2000,
Sukuk Negara on August 26, 2008 and Sukuk Ritel Negara on February 25, 2009.
However, the number of local investors in Indonesia still account as the lowest in the
region, with only 0.2 percent of total population (The Jakarta Post, 2013). This condition
encourages the author to demonstrate the advantages of investing in sharia financial
instruments and hopes that it will encourage more muslim to invest in sharia capital
market. Hence, the number of local investors in Indonesia could increase.
This research aims to demonstrate the advantages of investing in sharia capital market
compared to the conventional one. To make this research suitable for the individual
investors, risk and return analysis is used throughout the research. The author will give
general comparison of the sharia capital market with the conventional market, and then
further use the sharia financial instruments to create portfolios using the Modern Portfolio
Theory approach. The portfolios created will further be compared with the market. Hence,
the author will be able to show that by creating portfolios, the advantages of investing in
sharia capital market could be further enhanced.
1
Muhammad Rizki Ramadhan, Student in Bachelor Program School of Business and Management Institut
Teknologi Bandung, Indonesia, Email: rizki.ramadhan@sbm-itb.ac.id,
2
Anggoro Budi Nugroho, MBA, Department of Finance, School of Business and Management Institut
Teknologi Bandung, Indonesia, Email: anggoro@sbm-itb.ac.id,
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
The next part of this paper presents the past literature on the performance comparison of
sharia and conventional capital market as well as several theories and equation related
with this research. Section three presents the sample of study and methodology of this
research. Section four presents the result of the study. Final section will summarize the
results.
2. Literature Review
Huda & Nasution (2008), from the book Investasi Pada Pasar Modal Syariah, gives an
overview of a research done by Rachmayanti (2003), who examined the performance of
sharia stocks portfolio in the year 2001 and 2002. The study analyzed the return, risk,
adjusted return, and used index such as Sharpe Index, Treynor Index, and Alpha-Jensen
Index of the portfolio, then compared it with the Jakarta Composite Index, LQ45, and
Jakarta Islamic Index, based on single and multiple benchmark approach. The Markowitz
approach was also used in that research. The conclusion of the study showed that the
overall performance of sharia stocks is relatively better compared to conventional stocks,
especially in 2001 where the sharia stocks portfolio outperformed not only the
conventional stocks, but also the JII index.
This paper focuses on investment in Indonesia sharia capital market, with Sharia Stocks
from Jakarta Islamic Index and Sukuk Negara Ritel as the financial instruments used. The
Jakarta Islamic Index is one of the index included in Indonesia Stock Exchange. The
stocks included in JII must meet procedural standards as well as performance
requirements, such as: Must be listed on the exchange for at least three months prior to
application; The company’s annual or mid-year financial report must have an obligation
asset ratio of no more than 90%; Rank in the top 60 shares based on the previous year’s
average market capitalization; Rank in the top 30 shares based on the previous year’s
average liquidity in the regular market (Huda & Nasution, 2008:56). Therefore the stocks
included in Jakarta Islamic Index is very much affiliated with the Islamic law and regarded
as stocks that perform well in the market. The reevaluation of the listed share is held
every six months, once in January and again in July.
Indonesia’s government sukuk (Sukuk Negara) is sold in retail to individuals through
selling agents in the form of Sukuk Negara Ritel (SNR). It targets the individual investors
as the procedures to invest are simple and it only needs a small amount of minimum
purchase, which is IDR 5.000.000,-.
Among the many factors, risk and return are more important, especially for individual
investors. Therefore this research will use the risk and return analysis and will be further
elaborated by creating portfolios using Markowitz Efficient Theory. The Markowitz theory,
which is nowadays known as Modern Portfolio Theory, is defined as “principles underlying
analysis and evaluation of rational portfolio choices based on risk-return trade-offs and
efficient diversification” (Bodie et al. 2014:G-8). By creating diversified portfolios, this
research will be able to further elaborate the advantages of sharia financial instruments,
rather than just showing the advantage of one single asset.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
The return for stocks in this research is calculated arithmetically using the formula,
Where,
r
= Return of period t
Pt
= Price of the stock at period t
P0
= Price of the stock at period t-1
While the return of Sukuk in this research is calculated using holding period return, with
an assumption that no specific record date is needed for the investor to receive coupon
payment.The equation is,
Where,
C = Coupon earned during period t
The expected return of an asset, will be calculated using the average return, with the
equation,
Where,
= Arithmetic Return
= Sum of n number of return
= Number of period
The risk of an asset in this research will be calculated using standard deviation, with the
equation,
√
∑
̅
Where:
= Standard Deviation of an Asset
= Return of period t
̅
= Average return of the whole investment period
= Number of return during investment period
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Beta is a historical measure of volatility. It measures how an asset moves versus a
benchmark. The equation to calculate beta, is as follow,
with:
= Beta of asset i relative to the market
= Covariance value between return of asset i and market return
= Variance of the market return
Alpha is a historical measure of an asset’s return on investment compared to the risk
adjusted expected return. The equation of alpha is stated below,
̅
with:
̅
= Alpha of asset i
= Average return of asset i
= Market Return
= Risk Free Rate
= Beta of asset i relative to the market
The expected return of a portfolio is simply the sum of weight composition of each asset
multiplied by the expected return of each asset. The equation is as follow,
̅
∑
̅
Where,
̅ = Expected return of portfolio
= The proportion of funds invested in asset i, with ∑
̅ = Average Return of Asset i
=1
The portfolio risk is defined by its standard deviation. The approach, however, is different
to the approach of calculating portfolio return as adding more assets to the portfolio tends
to reduce the portfolio risk.
To calculate the portfolio risk, matrices is preferred in the process. The equation is as
follow,
√
Where:
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
= Standard Deviation of Portfolio p
= Vector of Portfolio Weights
= Covariance matrix for returns on asset in portfolio
= Variance of portfolio return
The equation to calculate the covariance between two assets is stated below,
̅
∑
̅
with:
= Return of asset x at time t
̅ = Average return of aseet x
= Return of asset y at time t
̅ = Average return of asset y
= number of period of investment
Portfolio Beta measures the volatility of portfolio relative to the market. It is calculated
from the weighted average of beta value of each asset. The equation is shown below,
∑
with:
= Beta of portfolio p relative to the market
= Proportion of funds invested in asset i
= Beta of asset i.
Sharpe Measure is defined as “reward-to-volatility ratio; ratio of portfolio excess return to
standard deviation” (Bodie et al., 2014:G-12). The ratio is used to measure the riskadjusted performance, measuring how much return is achieved in exchange of certain
level of risk.
̅
where:
̅ = Average return of portfolio p
= Risk-free rate
= Standard Deviation of portfolio p
Jensen’s measure is the average return on the portfolio over and above that predicted by
the CAPM, given the portfolio’s beta and the average market return. Jensen’s measure is
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
the portfolio’s alpha value. (Bodie et al., 2014:848). The equation to calculate the alpha of
a portfolio, is as follow,
̅
with:
̅
= Alpha of portfolio p
= Expected return of portfolio p
= Market Return
= Risk Free Rate
= Beta of portfolio p relative to the market
Treynor’s measure gives excess return per unit of risk, but it uses systematic risk instead
of total risk (Bodie et al., 2014:848). The calculation of Treynor Measure is similar with
Sharpe-Ratio, except that it uses Beta instead of standard deviation as the risk. The
equation is,
̅
with:
̅
= Expected return of portfolio p
= Risk Free Rate
= Beta of portfolio p relative to the market
3. The Methodology and Model
This research focuses on Jakarta Islamic Index stocks and Sukuk Ritel Negara to
represent the sharia capital market. To compare the Jakarta Islamic Index performance
with the market and LQ45, the daily closing price of the three indices are used to
calculate the return and standard deviation. The return and standard deviation of each
index will then be compared.
The stocks chosen from the Index are stocks which were always included in Jakarta
Islamic Index during February 27, 2013 until June 20, 2014. That means all stocks
included during the JII period of December 2012-May 2013, June 2013-November 2013,
and December 2013-May 2014. 25 stocks were selected from this filtering. Further
filtering method were used by using alpha of stocks. Stocks with positive alpha value will
be selected and those with negative value will be eliminated. 13 stocks were selected
from this process and will be included in the construction of stocks portfolio as well as
diversified portfolio. 2 Sukuk Ritel Negara were chosen in this research as both Sukuk are
still not yet matured. The two Sukuk Ritel Negara are SR004 and SR005. These two
Sukuk will be included in the construction of diversified portfolio. All the calculations in this
research are based on the daily closing price data of the assets, which were taken from
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Dunia Investasi website for the stocks, and Indonesia Bond Pricing Agency for the Sukuk,
with the addition that coupon rate is also used for Sukuk.
Using the daily closing price data, the daily return, as well as the standard deviation of all
assets are then calculated. The data will further be used to construct an optimal portfolio.
There are two portfolios with different objectives that will be constructed, one is to
minimize the risk, and the other is to maximize the sharpe ratio. The two objectives will be
used for both stocks portfolio and diversified portfolio. The optimal portfolio will be
decided and used for further comparison with the indices. Several comparison methods
such as Sharpe Ratio, Treynor Measure, and Jensen’s Alpha Measure are used in the
process.
4. The Findings
This research aims to demonstrate the advantages of investing in Sharia capital market
using Modern Portfolio Theory approach. The comparisons shown in this research are
mostly based on risk and return analysis. The first calculation shown is the return and
standard deviation comparison between Jakarta Islamic Index, LQ45 and market index
(JCI).
Table 1
Indices Risk and Return Comparison
JCI
JII
LQ45
μ
0.0171%
0.0214%
0.0168%
σp
1.2946%
1.6136%
1.6145%
The average return of JII index is surpassing the average return of both JCI and LQ45
during the research period. While the average return of Jakarta Islamic Index is higher
compared to the LQ45 and JCI, the standard deviation of Jakarta Islamic Index is slightly
lower than LQ45, showing a good performance from the JII Index as it could surpass the
average return of LQ45 while also maintaining its risk slightly lower than the LQ45’s.
The next step is to construct optimal portfolios from JII stocks and Sukuk Ritel Negara.
From the filtering of Jakarta Islamic Index stocks, 13 stocks were always included during
the JII period of February 27, 2013-June 20, 2014 and all have positive alpha value.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Table 2
Stocks Information and Alpha Value
No. Tickers
1 AALI
2 AKRA
3 BSDE
4 ICBP
5 INTP
6 JSMR
7 KLBF
8 LSIP
9 MNCN
10 PGAS
11 TLKM
12 UNTR
13 UNVR
Company
Astra Agro Lestari Tbk PT
AKR Corporindo Tbk PT
Bumi Serpong Damai PT
Indofood CBP Sukses Makmur Tbk PT
Indocement Tunggal Prakarsa Tbk PT
Jasa Marga Persero Tbk PT
Kalbe Farma Tbk PT
Perusahaan Perkebunan London Sumatra Indonesia Tbk PT
Media Nusantara Citra Tbk PT
Perusahaan Gas Negara Persero Tbk PT
Telekomunikasi Indonesia Persero Tbk PT
United Tractors Tbk PT
Unilever Indonesia Tbk PT
Sector
Consumer Staples
Materials
Financials
Consumer Staples
Materials
Industrials
Health Care
Consumer Staples
Communications
Utilities
Communications
Energy
Consumer Staples
α
0.001424
0.000230
0.000343
0.000648
0.000419
0.000257
0.000883
0.000649
0.000182
0.000541
0.000639
0.000640
0.001020
Next, using the daily closing price data, the return and standard deviation of the assets
are calculated. The two Sukuk Ritel Negara, SR004 and SR005 are also included in the
process.
Table 3
Sukuk Ritel Negara Information
No
1
2
Sukuk Code
Maturity Date
Tenor
SR004
SR005
September 21, 2015
February 27, 2016
3.5 years
3 years
Coupon
Rate
6.25%
6%
Interest
Frequency
Monthly
Monthly
As shown in the table 4.3, SR005 has longer tenor, although for only 6 months. SR005 is
Sukuk Ritel Negara with the lowest coupon rate that has ever been released by the
government. It only has a coupon rate of 6%. Both Sukuk interest payment are done
every month.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Table 4
Return, Standard Deviation and Variance of Indices and All Assets
JCI
JII
LQ45
AALI
AKRA
Average
Return
Std.
Deviation
Variance
0.0171%
0.0214%
0.0168%
0.159%
0.040%
1.2946%
1.6136%
1.6145%
2.531%
2.798%
0.000168
0.000260
0.000261
0.000640
0.000783
Cont. Table 4
Return, Standard Deviation and Variance of Indices and All Assets
BSDE
ICBP
INTP
JSMR
KLBF
LSIP
MNCN
PGAS
TLKM
UNTR
UNVR
SR004
SR005
Average
Return
Std.
Deviation
Variance
0.052%
0.082%
0.059%
0.043%
0.105%
0.082%
0.036%
0.071%
0.081%
0.081%
0.119%
0.011%
0.015%
3.078%
2.427%
2.636%
2.107%
2.398%
3.065%
3.238%
2.425%
2.323%
2.519%
2.546%
0.235%
0.221%
0.000947
0.000589
0.000695
0.000444
0.000575
0.000939
0.001049
0.000588
0.000540
0.000634
0.000648
0.000006
0.000005
AALI earned the highest daily return with 0.159%, followed with UNVR with 0.119%. All
the stocks with positive alpha did not experience loss in the average return, as all are in
positive value.
The average return of two Sukuk Ritel Negara are indeed the lowest (0.011% and 0.015%
for SR004 and SR005 respectively) compared to all the stocks. However, it is acceptable
as they also offer the lowest standard deviation compared to the stocks (0.235% and
0.221% for SR004 and SR005 respectively). This aligns with the theory of high risk high
return, low risk low return.
The optimal portfolios are constructed using the return and standard deviation data. The
data are first used to create the variance-covariance matrices, which will then be used to
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
find the portfolio. Solver, a Microsoft Excel’s program, is used to determine the proportion
of assets that constructed the portfolio. Two objectives were set, one to minimize risk, and
the other one to maximize the Sharpe Ratio. The objective of minimizing risk aims to have
a portfolio that has lower standard deviation than any assets included in the portfolio
construction process, while the objective of maximizing Sharpe Ratio aims to maintain low
level of standard deviation while earning relatively high return.
Table 5
Stocks Portfolios Weight, Return, Standard Deviation, and Sharpe Ratio
Stocks Portfolios
Equal
Max
wt
Return
Constraining Variable
Value of Constraint
None
N/a
at σ<=
N/a
Min St.
Deviation
Max
Sharpe
at μ =
N/a
None
N/a
Portfolio Weight
AALI
AKRA
BSDE
ICBP
INTP
JSMR
KLBF
LSIP
MNCN
PGAS
TLKM
UNTR
UNVR
Σw
μ
σp
μ/σ
7.6900% 100.0000%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
7.6900%
0%
15.3804%
7.2166%
0%
11.9119%
0%
21.3565%
3.9074%
6.7466%
0%
13.0093%
11.5150%
7.1097%
1.8466%
51.7324%
0%
0%
7.1045%
0%
0%
19.6456%
0%
0%
0%
6.2251%
0%
15.2923%
100%
100%
100%
100%
0.0777%
1.5525%
0.0395
0.1591%
2.5306%
0.0564
0.0824%
1.4374%
0.0460
0.1322%
1.7699%
0.0654
For the stocks portfolio, the objective of minimizing risk, JSMR stock has the highest
proportion (21.3565%) as it has the lowest standard deviation (2.107%) among all the
stocks. While AALI unsurprisingly has the highest proportion (51.7324%) for the objective
of maximizing sharpe ratio as it is the stock with the highest return (0.159%). The
objective of minimizing standard deviation/risk results in the lowest standard deviation
(1.4374%) compared to all the assets considered in the portfolio (which in this case of
stocks portfolio, is JSMR with standard deviation of 2.107%). This align with the
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
statement mentioned before that the objective of minimum risk will earn portfolio with
lower standard deviation than the lowest single asset’s standard deviation among the
selected assets. Maximizing the sharpe ratio will also give low standard deviation and
relatively high return, eventhough the standard deviation (1.7699%) is not as low as the
standard deviation of Minimum Risk portfolio (1.4374%), and the return (0.1322%) is not
as high as the return of AALI (0.159%), which is the highest of them. As it generates
relatively high return with low level of risk, the maximum sharpe portfolio is selected to be
the optimal portfolio.
Table 6
Diversified Portfolios Weight, Return, Standard Deviation, and Sharpe Ratio
Constraining Variable
Value of Constraint
Equal
wt
Diversified Portfolios
Max
Return
Min St. Deviation
None
N/a
at σ<=
N/a
at μ =
N/a
Optimal Portfolio
Max
Sharpe
at μ =
0.0750%
None
N/a
Portfolio Weight
AALI
AKRA
BSDE
ICBP
INTP
JSMR
KLBF
LSIP
MNCN
PGAS
TLKM
UNTR
UNVR
SR004
SR005
6.6667% 100.0000%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
6.6667%
0%
0.1073%
0%
0%
0%
0%
0.1737%
0%
0%
0%
0%
0%
0.5596%
0.2424%
43.3845%
55.5326%
26.3947%
0%
0%
3.4682%
0%
0%
10.0154%
0%
0%
0%
3.1358%
0.2439%
8.1347%
0%
48.6074%
51.7324%
0%
0%
7.1046%
0%
0%
19.6456%
0%
0%
0%
6.2252%
0%
15.2922%
0%
0%
Σw
100%
100%
100%
100%
100%
μ
σp
0.0690%
1.3499%
0.1591%
2.5306%
0.0138%
0.1966%
0.0750%
0.9220%
0.1322%
1.7699%
0.0390
0.0564
-0.0133
0.0636
0.0654
μ/σ
For the diversified portfolios, the minimum risk portfolio generate lower standard deviation
(0.1966%) than the standard deviation of SR005 (0.2210%) which is the asset with lowest
standard deviation among the considered assets. The return of Minimum Standard
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Proceedings of 7th Asia-Pacific Business Research Conference
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Deviation portfolio (0.0138%) is relatively low compared to the average return of other
assets such as stocks. This occurred as the portfolio proportion is dominated by SR004
and SR005 which has low return. However, the return of Minimum Standard Deviation
portfolio (0.0138%) is higher than the average return of SR004.
The author does not recommend both Minimum Standard Deviation portfolio and
Maximum Sharpe Portfolio to become the optimal portfolio. That is because the Maximum
Sharpe portfolio includes no Sukuk in it. While the Minimum Standard Deviation portfolio
will generate negative sharpe ratio, which means there is no mean in investing as
investing with risk-free rate will earn higher return than investing in the portfolio. As the
result, the author recommends one portfolio along the efficient frontier that lies in the
medium risk medium return area, which is in the middle of the frontier. The portfolio will
generate return that could still compete with individual stocks and standard deviation that
is lower than the optimal stocks portfolio standard deviation, which one again emphasizes
the effect of sukuk inclusion to the portfolio.
The optimal mix portfolio consists of mostly SR005. It omits the SR004 as it is less
effective than SR005 due to its relatively lower return and higher risk compared to
SR005’s. The inclusion of AALI stock will increase the expected return of the portfolio.
The optimal portfolio, generates return (0.0750%) that is higher than both return of Sukuk
Ritel Negara (0.0107% and 0.0147% for SR004 and SR005 respectively). The return is
also higher than several stocks, such as AKRA (0.040%), BSDE (0.052%), INTP
(0.059%), JSMR (0.043%), MNCN (0.036%), and PGAS (0.071%). However, the portfolio
could lower its standard deviation to 0.9220%, which is lower than the standard deviation
of optimal stocks portfolio.
Table 7
Comparison of Sharpe Ratio
μ
σp
Sharpe Ratio
Stocks
Mixed
IHSG
JII
LQ45
Max Sharpe
Optimal Portfolio
0.0171%
1.2946%
0.0005
0.0214%
1.6136%
0.0031
0.0168%
1.6145%
0.0003
0.1322%
1.7699%
0.0654
0.0750%
0.9220%
0.0636
From the table, the JII index sharpe ratio is the highest (0.0031) compared to the market
and the LQ45 index (0.0005 and 0.0003 respectively). Although the JII index has higher
standard deviation (1.6136%) than IHSG (1.2946%), the higher return of JII index makes
the index beats the IHSG in terms of risk adjusted return. This also means that the JII
index offers more return for every percentage of risk.
The optimal stocks (0.0654) and mix (0.0636) portfolio offers much more higher risk
adjusted return compared to the market (0.0005), JII index (0.0031) and LQ45 index
(0.0003). This can happen due to the relatively much higher return of optimal stocks
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portfolio (0.1322%) and the low standard deviation of mix portfolio (0.9220%) that
includes Sukuk.
Table 8
Comparison of Treynor Measure
Mix
Stocks Portfolio Portfolio
Treynor
Measure
0.001310
0.001251
JII
0.000042
LQ45
0.000003
From the Treynor Measure table, The JII index has Treynor Measure of 0.000042 while
the LQ45 index has 0.000003 treynor measure. This means that for every increase in unit
of volatility, the JII index will generate 0.000039 higher return than the LQ45, thus the JII
Index outperform LQ45 as it gives more return for each percentage of risk. The treynor
measure of optimal stocks and mix portfolio are also outperforming the JII index and
LQ45 by some distance. The stocks portfolio (0.001310) outperform the mix portfolio
(0.001251) as the stocks portfolio earn 0.000059 more than the mix portfolio for every
increase in unit of volatility. Eventhough the stocks portfolio has higher beta (0.883743)
than the mix portfolio’s (0.468436), the stocks portfolio has higher return (0.1322%) than
the mix portfolio (0.0750%). Thus, the stocks portfolio is better in terms of risk-adjusted
return.
Table 9
Comparison of Jensen Alpha Measure
Mix
Stocks Portfolio Portfolio
α
0.001152
0.000583
JII
0.000042
LQ45
-0.000004
From the table of Jensen’s Alpha above, the JII index has higher alpha (0.000042) than
LQ45 index which has negative value (-0.000004). It means that the JII index earns return
0.000042 higher than the expected market return based on the CAPM theory. As such, JII
index is also beating the LQ45 as it has higher alpha than the LQ45 index, indicating the
JII index earns higher return than the LQ45 compared to the expected market return. All
the optimal portfolios constructed in this research are in positive value, with stocks
portfolio (0.001152) outperforming the mix portfolio (0.000583). This means that the
stocks portfolio earn higher return than the expected market return. The mix portfolio’s
lower alpha (0.000583) is understandable as it mostly involves sukuk and as it is a type of
obligation, should not be compared with the IHSG that is used as the market benchmark
to calculate alpha. That is because IHSG consist of stocks instead of obligations.
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
5. Summary and Conclusions
This paper aims to demonstrate the advantages of investing in Sharia Capital Market
through risk and return analysis. The risk and return comparison of selected Indonesia’s
stocks indices, Jakarta Islamic Index (sharia capital market), Jakarta Composite Index
(market), and LQ45, shows that Jakarta Islamic Index has higher return than the other
two indices, and lower standard deviation than LQ45. The comparison of Sharpe Ratio,
shows that Jakarta Islamic Index’s sharpe ratio outperform the sharpe ratio of both LQ45
and Jakarta Composite Index. While the Jakarta Islamic Index is also able to outperform
the LQ45 in the Treynor Measure and Jensen Alpha Measure comparison. Giving a
general conclusion that Jakarta Islamic Index is able to outperform the market and LQ45
index.
In addition, this paper also try to construct optimal portfolios to further elaborate the
advantages of investing in Sharia capital market. The optimal portfolio consist of only
selected Jakarta Islamic Index stocks outperform the market (Jakarta Composite Index),
LQ45 index, and the Jakarta Islamic Index itself in the comparison of Sharpe Ratio. The
optimal stocks portfolio also outperform the LQ45 and Jakarta Islamic Index in the
comparison of Treynor Measure and Jensen Alpha Measure. While the optimal diversified
portfolio, consist of both selected Jakarta Islamic Index stocks and Sukuk Ritel Negara,
outperform the Jakarta Composite Index, LQ45, and Jakarta Islamic Index, in the
comparison of Sharpe Ratio. It also outperform the JII and LQ45 in the comparison of
Treynor Measure and Jensen Alpha Measure.
From the Portfolio Optimization approach, the advantages of investing in sharia capital
market could further be elaborated. Constructing portfolio that consist of sharia stocks
could create an optimal portfolio that has lower standard deviation while also maintaining
high level of return. While adding Sukuk Negara Ritel to the portfolio of sharia stocks
could lower the standard deviation of the portfolio, which means lower investment risk.
All the findings above prove that sharia capital market could not be underestimated.
During the period of research, it is clear that the JII index is outperforming the market as
well as LQ45 index. Further methods of constructing portfolios consisting of sharia
financial assets enhance the performance furthermore, even beating the JII index itself.
Thus, after going through all the research processes, the author concludes that the sharia
capital market performs better during the research period.
References
BODIE, Z. et al. 2014. Investments. 9th Ed. Singapore: McGraw-Hill/Irwin
DUNIA
INVESTASI.
(n.d)
Historical.
[Online]
Available
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http://www.duniainvestasi.com/bei/prices/stock/. [Accessed: June 2014]
HUDA, N & NASUTION, M.E. 2008. Investasi Pada Pasar Modal Syariah. 2nd Ed.
Jakarta: Prenada Media Group
INDONESIA BOND PRICING AGENCY. (n.d) Sukuk Data. [Accessed: June 20th 2014]
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Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
MAPS OF WORLD. 2012. Top Ten Countries With Largest Muslim Population. [Online]
December 24, 2012. Available From: http://www.mapsofworld.com/world-topten/world-top-ten-countries-with-largest-muslim-populations-map.html.
[Accessed:
20th July 2014]
THE JAKARTA POST. 2013. Indonesia Has Fewest Local Investors. [Online] November
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http://www.thejakartapost.com/news/2013/11/19/indonesia-has-fewest-localinvestors.html. [Accessed: 15th July 2014]
Appendix
Appendix 1
Alpha and Beta
Stocks Portfolio
Mix Portfolio
JII
LQ45
β
0.883743
0.468436
1.202343
1.232422
α
0.001152
0.000583
0.000042
-0.000004
Treynor Measure
0.001310
0.001251
0.000042
0.000003
15