Capital Asset Pricing Model (CAPM) and Investment Risk from Islamic Perspective

Abstract

The Capital Asset Pricing Model (CAPM) describes the relationship between the expected return and risk of investing in a security. Expected return on a security can be describes between risk-free return and a risk premium, which is based on the beta of that security. Capital Asset Pricing Model (CAPM) will be used as a model to measure the level of risk using data from the year 2007 when subprime crisis started until 2010. Results of the study show that the volatility of stock market in Malaysia can be considered as a high volatility and its means as a high risk. The findings of study also found that Islamic economic has recognizes the existence of investment risk. One of methods that are used in the management of risk was diversification. This method will reduces risk by allocating investments among various financial instruments, industries, and other categories. In conclusion, the process of diversification that was done by most of the investors are comply with concept of risk management in the Islam.