Unveiling The Key Differences: Capital Asset Pricing Model and Sharia Asset Pricing Model

Differences Between Capital Asset Pricing Model (CAPM) and Sharia Asset Pricing Model (SAPM)

1. Foundational Principles
CAPM; Based on conventional finance principles, Assumes all investors are rational and markets are efficient, and uses traditional financial metrics and instruments.

SAPM; Based on Islamic finance principles, Adheres to Sharia law, avoiding riba (interest), gharar (excessive uncertainty), and maysir (gambling), and uses Sharia-compliant financial instruments and metrics.

2. Risk-Free Rate
CAPM; The risk-free rate is typically represented by government bonds, which pay interest.

Example: U.S. Treasury bonds or Indonesian government bonds.

SAPM; The risk-free rate is derived from Sharia-compliant instruments like sukuk (Islamic bonds), which do not pay interest but generate returns through profit-sharing agreements.

Example: Sukuk issued by Islamic financial institutions or governments.

3. Market Portfolio
CAPM; The market portfolio includes all available assets in the market, regardless of their nature.
Uses broad market indices like the S&P 500 or IDX Composite.

SAPM; The market portfolio consists only of Sharia-compliant assets.
Uses Sharia-compliant indices like the IDX Sharia Growth index or Dow Jones Islamic Market Index.

4. Beta 
CAPM; Beta measures an asset's volatility relative to the overall market portfolio, which includes all types of assets.
Reflects systematic risk that cannot be diversified away.

SAPM; Beta measures an asset's volatility relative to the Sharia-compliant market portfolio.
Takes into account the unique risk characteristics of Sharia-compliant assets.

5. Expected Market Return
CAPM; The expected market return is based on the overall market portfolio and reflects the return of a diversified portfolio of all available assets.

SAPM; The expected market return is based on the Sharia-compliant market portfolio and reflects the return of a diversified portfolio of Sharia-compliant assets.

6. Ethical and Religious Considerations
CAPM; Does not consider ethical or religious factors in the selection of assets and focuses purely on financial metrics and market dynamics.

SAPM; Strictly considers ethical and religious factors, excluding any assets involved in prohibited activities (e.g., alcohol, gambling, pork products) and Incorporates investor sentiment towards Sharia compliance and ethical investment.

7. Application and Relevance
CAPM; Widely used in conventional finance for asset pricing, portfolio construction, and risk management. Applicable to a broad range of investors and financial markets.

SAPM; Specifically designed for use in Islamic finance. Relevant to Muslim investors and institutions seeking to comply with Sharia law in their investment decisions.

The CAPM and SAPM serve similar purposes in their respective domains assessing the relationship between risk and expected return but differ significantly in their foundational principles, components, and applications. CAPM operates within the conventional financial framework, while SAPM is tailored to the requirements and restrictions of Islamic finance, ensuring compliance with Sharia law and ethical investment principles. By understanding these differences, investors can choose the appropriate model based on their financial goals and ethical considerations.