ISLAMIC MARKET INDICES: A COMPARISON WITH CONVENTIONAL WORLD INDICES BASED ON THE ADJUSTED SHARPE RATIO

Ibrahim Affaneh
Mohamed Albohali
Robert J. Boldin
Indiana University of Pennsylvania
ABSTRACT
Thirty five Islamic indices were examined in an attempt to investigate the comparative
performances of Islamic and non-Islamic or conventional global equity indices. Daily returns
were analyzed for the period November 22, 2004 and November 13, 2009. The unadjusted or
conventional Sharpe ratio and the Adjusted Sharpe Ratio (adjusted for autocorrelation, skewness
and kurtosis) were employed in the performance comparison. For the period analyzed, most
Islamic indices outperformed the S&P 500 and the Dow Jones World Index. The combined effect
of autocorrelation, skewness and kurtosis caused the Adjusted Sharpe Ratio to decline by as much
as 24% when compared to the unadjusted Sharpe Ratio. Also, changes in the ranking of some
Islamic indices were noted which can be attributed mainly to autocorrelation and partly to
skewness and kurtosis. In some cases, skewness and kurtosis generated an offsetting impact. The
results could lead one to conclude that the Adjusted Sharpe Ratio is more accurate since it reflects
the real-world nonsymmetrical and peaked distribution of portfolio returns.