Capital asset pricing model and pricing of islamic financial instruments

The prohibitions of riba (interest) and trading in non-halal businesses in islam redefines investment universe assumed by capital asset pricing model (capm). in islamic investment world,risk-free asset and market portfolio with non-halal constituents are irrelevant. we propose two-versions of shariah-compliant capm that use shariahcomplaint market portfolio and are free of risk-free asset. we test the proposed models together with conventional capm in bursa malaysia using three- and ten-year data. the test results of the models with three-year data reveal remarkable similarity between versions of shariah-compliant models. besides,shariah-compliant capm is as capable of explaining returns on shariah-complaint stocks as conventional capm is of explaining returns on all stocks.