Comparison of ethical and conventional portfolios with second-order stochastic dominance efficiency test
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 14 November 2016
Abstract
Purpose
This paper aims to compare two groups of stocks to analyze the efficiency of an ethical portfolio in comparison with a conventional portfolio.
Design/methodology/approach
Efficiency test by second-order stochastic dominance (SSD) approach is applied on two groups, which consist of 12 stocks. Ethical portfolio is chosen from the stocks complying with the participation banking rules. Conventional portfolio is selected from Borsa Istanbul (BIST) with choosing the corresponding stocks for each ethical stock according to the sector and market capitalization. All the stocks of both groups are pairwise SSD compared.
Findings
Both groups of 12 stocks are inefficient portfolios; however, a group of 7 stocks constitute an efficient ethical portfolio with the total weight of 50.82 per cent among the set of 12 ethical stocks. On the other hand, a group of 6 stocks constitute an efficient conventional portfolio, with the total weight of 45.16 per cent among the set of 12 conventional stocks. By pairwise SSD comparison of corresponding stocks from both groups, despite none of the conventional stocks dominate ethical stocks, four ethical stocks dominated the conventional ones.
Originality/value
Back-testing and comparison with benchmark BIST 100 Index have been done for the selected portfolios. According to back-testing results, groups of SSD efficient stocks outperformed the groups, from which they were selected. Furthermore, both SSD efficient portfolios have higher returns than benchmark index, BIST 100.
Keywords
Citation
Tas, O., Tokmakcioglu, K., Ugurlu, U. and Isiker, M. (2016), "Comparison of ethical and conventional portfolios with second-order stochastic dominance efficiency test", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 9 No. 4, pp. 492-511. https://doi.org/10.1108/IMEFM-11-2015-0133
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited