Purpose The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance analysis. The advancement of Islamic finance leads to the question whether or not the practice of modern investment theories and analyses such as the Markowitz’s mean variance analysis and CAPM are in accordance to shariah and could be used in pricing Islamic financial assets. Therefore, this paper aims to present a review of the CAPM and to discourse the set of assumptions underlying the model in terms of shariah compliance. Design/methodology/approach Although most of the assumptions are not contradictory to shariah principles, there are Islamic variables such as prohibition of short selling, purification and zakat that should be taken into consideration when pricing Islamic financial assets. We then develop a mathematical model which is a modification of the traditional CAPM that incorporates principles of Islamic finance and integrating zakat, purification of return and exclusion of short sales. Findings As a proof-of-concept, this paper presents the results of an empirical study on the proposed shariah-compliant CAPM in comparison to the traditional CAPM. The results show that the proposed Islamic CAPM is appropriate and applicable in examining the relationship between risk and return in the Islamic stock market. Originality/value This study contributes to existing body of knowledge by presenting an algorithm and mathematical derivation of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance. The paper offers a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by modern investment theories of Markowitz’s mean variance analysis and CAPM.

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The purpose of this study is to evaluate the returns performance of Islamic mutual funds in Malaysia according to four types of asset portfolios which are Equity, Debt, Money Market and Asset Allocation. Using Sharpe and Adjusted Sharpe Ratio, Treynor and Jensen Indices as well as Modigliani Measure, the average daily returns for each type of asset fund are being compared relatively to two market benchmarks namely Kuala Lumpur Composite Index (KLCI) and Bursa Malaysia EMAS Shariah Index (FBMS). The period of comparison is divided into three; between 2001 to 2006 which is before Global Financial Crisis, during the period of crisis from 2007-2008 and post crisis of 2009 to 2010. Findings show that generally, all types of asset portfolios performed throughout 2001 until 2010. However, during Global Financial Crisis, Money Market Islamic mutual funds show better performance as compared to other types of asset portfolios. In addition, all types of Islamic mutual funds outperform in relative to market benchmarks and the outperformance is continued until 2010. The under performance results were only shown through Debt and Money Market Islamic Mutual funds from 2001 to 2006. The results provide information that would benefit the investors and market players in asset funds selection and weighing their investment during bullish or bearish periods.