Market Timing and Stock Selection Strategies in Shariah- Compliant Stock Portfolio

Abstract

This study focuses on market timing and stock selection strategies that could be implemented by individual investors of Shariah-compliant equity using the top ten constituents of the FTSE Bursa Malaysia Hijrah Shariah Index. Investors are assumed to enter and exit the stock market following the buy-and-sell signal from Moving Average Crossover. Meanwhile, for stock selection, this study aims to construct the optimal portfolio using the Sharpe Ratio Maximisation model and Naïve (1/N) portfolio. The level of market timing and selectivity skills of individual investors following the suggested investment strategies will be measured by using the Treynor-Mazuy model. The empirical results showed that the best Moving Average Crossover gave plausible trading frequencies and provided the most return to investors was the (1, 100, 0.01) strategy. Albeit, the stock allocation for the constructed portfolio was less diversified compared to the Naïve (1/N) portfolio, the composition of portfolio weights of the constructed portfolio was able to offer a more than average risk to reward ratio. Furthermore, in the out-of-sample framework, both portfolios outperformed the market benchmark. Unlike previous studies, this study backed tests the strategy and found that it was beneficial for individual investors of Shariah-compliant equities to enhance market timing and selectivity skills in stock investment.

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