Managing Shariah Non-Compliance Risk: Construction of a Low-Risk Shariah-Compliant Portfolio Using the Black-Litterman Portfolio Optimization Model

This study explores the challenges of managing Shariah Compliant Portfolios and the importance of addressing Shariah non-compliance (SNC) risk, particularly in the context of social media and reputation risk. The paper proposes using the Black-Litterman portfolio optimization model and incorporating the views of Shariah scholars to construct a Shariah compliant portfolio that generates better returns than the benchmark portfolio while addressing SNC risk. Additionally, the paper discusses the benefits of adding gold to a portfolio of stocks and bonds and provides insights on reallocating gold's weight based on the investor's risk-return preferences. The paper provides a comprehensive review of the literature on portfolio selection models, SNC risk, SNC risk assessment, and portfolio diversification through Shariah-compliant gold investments. The study's methodology and data sources are explained, and the results are presented and analyzed. The paper concludes by summarizing the main findings and discussing their implications for investors, policymakers, and asset managers in the realm of Islamic finance.