Economics Studies: Capital Asset Pricing Models?

The Capital Asset Pricing Model (CAPM) is a model used to determine the relationship between risk and the expected return of an investment. The model assumes that investors require a higher return for taking on higher risk. The basic formula of CAPM is:

E(Ri) = Rf + i (E(Rm)Rf)

In Islamic economics, investments must adhere to Sharia principles, which prohibit riba (interest), gharar (excessive uncertainty), and maysir (gambling). Here are key points related to using CAPM in the context of Islamic economics; a) Risk-Free Rate, In conventional CAPM, the risk-free rate is often represented by government bonds that pay interest. However, in Islamic economics, using interest-bearing instruments is not permissible. 

As an alternative, interest-free instruments like sukuk (Islamic bonds) can be used as the risk-free rate; b) Risk and Beta, Beta in CAPM measures systematic risk that cannot be diversified away. In the context of Sharia-compliant stocks on the IDX Sharia Growth index, the calculation of beta should consider factors that align with Sharia principles, ensuring that the investments analyzed do not involve prohibited businesses such as alcohol, gambling, or interest-based activities.; c) Market Return, Market return in CAPM is typically based on a market index that includes all stocks. 

However, in the context of Islamic economics, the market return should be based on an index that includes only Sharia-compliant stocks, such as the IDX Sharia Growth index.; d) Application of CAPM in IDX Sharia Growth, IDX Sharia Growth is an index comprising Sharia-compliant stocks selected based on criteria such as net profit growth trends, revenue relative to price, transaction liquidity, and strong financial performance.  CAPM can be used in the context of the Islamic capital market with some modifications to ensure compliance with Islamic economic principles. 

This study indicates that the CAPM model can accurately predict the returns of Sharia-compliant stocks in the IDX Sharia Growth index, providing a useful tool for Sharia-compliant investors to make better investment decisions. By using Sharia-compliant financial instruments and considering returns from Sharia-compliant indices, CAPM remains relevant and can be adapted to meet the needs of the Islamic capital market.