Evaluation of Risk Reduction for Portfolio in Islamic Investment Using Modern Portfolio Theory

Nashirah Abu Bakar, Sofian Rosbi

Investment, Modern Portfolio Theory, Three stock combination, Portfolio Risk, Portfolio Expected Return

Main objective of this study is to maximize expected return and in the same time lowering investment risk. The methodology implemented in this study is modern portfolio theory through diversification assets that has low or negative correlation factor. This study tried to discover the portfolio expected risk and portfolios risk for 3 stocks namely Top Glove Corporation Berhad, AirAsia X Berhad and Axiata Group Berhad. Data for the analysis is selected from June 2015 until September 2018 involving 40 monthly observations. Result indicates the correlation factor between Top Glove and Airasia X is negative; meanwhile other correlation is not significant. Therefore, the selection of these three stocks is complying with the requirement of modern portfolio theory. Result indicates there are nine optimal combinations that calculated in this study which are suitable to develop non-linear line of efficient frontier. Data shows with the increment weightage in Top Glove stock, the expected average return will be increase. This is because the mean average return for share price of Top Glove 3.65%. This is the highest return comparing to other two stocks. However the risk of share price of Top Glove is 8.6 %, which is on the risky side. In addition, this study concludes the portfolio can attained lower risk by combining three stocks. The important implication of this study is it will help investors to develop optimal investment to attain maximum expected return based on a given level of market risk.

10.22161/ijaers.5.11.7