TY - JOUR T1 - Avoiding Interest-Based Revenues while Constructing Shariah-Compliant Portfolios: <em>False Negatives and False Positives</em> JF - The Journal of Portfolio Management SP - 136 LP - 143 DO - 10.3905/jpm.2018.44.5.136 VL - 44 IS - 5 AU - Özgür Arslan-Ayaydin AU - Kris Boudt AU - Muhammad Wajid Raza Y1 - 2018/04/30 UR - https://pm-research.com/content/44/5/136.abstract N2 - Shariah law prohibits investments in equities of companies for which interest income is a considerable source of revenue. In practice, this is often enforced by prohibiting investments in firms for which the reported interest-based revenues exceed a predetermined percentage of the firm’s total revenue. In this article, the authors investigate an alternative approach that consists of avoiding firms that are expected to have interest-based revenues exceeding the acceptable threshold over the investment horizon. They compare the traditional backward-looking approach with the proposed forward-looking analysis for a sample of S&amp;P 500 firms over the period 1984–2015. Their results show that the forward-looking approach outperforms the backward-looking approach in terms of both fewer false positives (firms classified as compliant when they are not) and false negatives (firms classified as not compliant when they are).TOPICS: Security analysis and valuation, emerging ER -