Efficient Portfolio Selection from Halal Stocks Using Genetic Algorithm (GA)-Based Solution Approach

Ethical investment is a new term in the finance field. There are some avenues that are prohibited by some laws. In Shariah, investing money in some assets or businesses operating particular activities is restricted. For investors who do not want to invest in stocks of those companies prohibited by Shariah law on ethical grounds, for them, a term called Halal. Halal stocks are those companies that are engaged in those businesses which are allowed by Shariah law. Portfolio selection is the procedure of identifying the best portfolio among available options. The best portfolio is the portfolio that has the highest return with the lowest risk. Harry Markowitz introduced portfolio selection in 1952 by proposing the modern portfolio theory. After that, many exact approaches were presented by finance experts. These approaches provide the solution, but these approaches have many limitations. Some other approaches are needed to overcome these limitations to solve portfolio selection problem. In this study, an evolutionary approach named genetic algorithm inspired by the theory of natural selection is presented to solve the portfolio selection problem. This study demonstrated a solution to halal stock selection by a genetic algorithm. Four stocks are chosen from the BSE-500 Shariah index for empirical research. Returns of 12 months from June 2018 to May 2019 present the application of the genetic algorithm in halal portfolio selection. Empirical results show the robustness of the proposed approach in the portfolio selection domain.