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Prudence and temperance in portfolio selection with Shariah-compliant investments

Amine Mohammed Mounir (Department of Finance, ESCA Ecole de Management, Casablanca, Morocco)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 26 February 2021

Issue publication date: 27 July 2021




This paper aims to explore the impact of Sharīʿah-compliant stocks on other investor risk preferences beyond the risk aversion, namely, prudence and temperance.


This paper uses the non-parametric model data envelopment analysis with the shortage function as a measure of performance. The model uses three specifications considering skewness and kurtosis that describe according to expected utility theory, prudence and temperance.


Results show that first, efficient portfolios consist mainly of conventional stocks in the three-model specification. Second, the skewness improvement is achieved only when considering conventional stocks while Sharīʿah-compliant assets do not exhibit any impact on the third moment. Finally, diversification through both conventional and Sharīʿah-compliant stocks does not lead to kurtosis reduction. Sharīʿah-compliant stocks in efficient portfolios are sensitive to return and risk solely, and hence, prudence and temperance as related to skewness and kurtosis measures can be ignored in optimal portfolio selection during normal market conditions.

Research limitations/implications

Findings suggest the same conclusions for four Islamic screening methods; however, readers should be prudent due to the limited sample. Results show that Sharīʿah-compliant assets do not have an impact on higher-order moments optimal portfolio returns, and hence, question the commonly admitted assumption of non-normality return distributions at least for Sharīʿah-compliant stocks.

Practical implications

The research findings suggest that Islamic investor preferences are described only by return and risk along with Sharīʿah criteria for stock selection and portfolio allocation. Portfolio managers should not care about higher-order moments to manage Sharīʿah-compliant funds. The traditional mean-variance Markowitz framework will be sufficient for investment or allocation decision-making. Description of Sharīʿah-compliant portfolio returns with only the first two order moments gives such asset more resiliency to extreme events like a crisis.


This research is the first in literature exploring whether prudence and temperance defined by higher-order moments can be drivers, besides Sharīʿah criteria, in portfolio allocation decision-making. This study is unique in terms of methodology and application. It uses individual stock data on the Casablanca Stock Exchange.



Mounir, A.M. (2021), "Prudence and temperance in portfolio selection with Shariah-compliant investments", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 4, pp. 753-766.



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