Student Name

Abdul MateenFollow


Master of Science in Islamic Banking & Finance


Department of Finance

Faculty/ School

School of Business Studies (SBS)

Date of Submission

Spring 2024


Dr. Sana Tauseef,Associate Professor and Director QEC, Department of Finance

Committee Member 1

Syed Aun R. Rizvi, Associate Professor of Finance, Lahore University of Management Sciences (LUMS)

Committee Member 2

Dr. Ameenullah Aman, Associate Professor of Finance, SZABIST

Committee Member 3

Dr. Irum Saba


Investment in the capital market is both risky and rewarding. Asset pricing models seek to find anomalies related to cross sectional variations of returns of stocks. Modern Portfolio Theory of Markowitz inspired investors of earning good returns without commensurate risk using portfolio of diverse securities that could ensure steady returns in all times. Efficient Market Hypothesis of Sharpe paved the way of understanding the working of capital markets and to the development of one factor mode, Capital Asset Pricing Model (CAPM) suggesting return of an assets only depends on its sensitivity to broad-based market. As empirical studies both in developed markets and emerging economies, documented that CAPM left much of the variations of mean returns unexplained, Fama and French initially suggested size and book-to-market equity and later profitability and investments factors to have significant explanatory power to describe variations of expected returns of stocks. We have three types of samples: All-Sample stocks, Shariah-compliant stocks and conventional stocks. We constructed equal-weighted deciles portfolios based on anomalies found in the asset pricing studies of size, book-to-market equity, profitability, investments, liquidity and momentum. For RHS factors, 2 * 3 sorting is used. We employed univariate sorting.

Our results suggest that multifactor models suggested by Fama and French (1992, 2015) are superior to one-factor model, CAPM. Our results also consistent with Fama and French (1992) that size factor subsumed the liquidity factor. We document modest incremental power of Fama and French five-factor model over other models in explaining returns of portfolio constructed on risk anomalies. HML factor is consistently priced in the sample data and factor spanning tests would not confirm its redundancy in our sample, but SMB was a redundant factor. Both conventional stocks and Shariah-compliant stocks behave similar. Bursa Malaysia is largest market of Shariah-compliant securities and provides an attractive opportunity to diversify and earn good returns using factor investing to Shariah-compliant investors and to those who wish to diversify their investment portfolio by employing factor investing.

We hope that it would facilitate Shariah-compliant investors by providing a tested and reliable framework to formulate profitable investment strategies. We aim that investment in the stock market will no longer be considered a game of luck or chance by analyzing the return patterns that are consistent and time-tested.

Document Type

Restricted Access

Submission Type


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