Quantitative framework for shariah-compliant multi-period fuzzy portfolio optimization: a sustainable approach to ethical investing

Abstract

Purpose This paper aims to propose a Shariah-compliant multi-period fuzzy portfolio optimization model that accounts for Shariah compliance through purification processes and incorporates various Shariah constraints, including sustainability constraints. This model aims to ensure both ethical alignment and robust portfolio management while navigating modern financial complexities and fostering responsible and sustainable investment practices. Design/methodology/approach The methodology involves a dynamic programming method to solve the proposed program, with returns of the assets assumed to be trapezoidal fuzzy variables. This approach allows for the quantification of portfolio return and risk by the possibilistic mean and semivariance of the fuzzy returns, respectively. A numerical study based on real stock market data tests the efficiency of the proposed algorithm. Findings The research showcases the model’s effectiveness in managing Shariah-compliant portfolios under financial uncertainties and supports the importance of incorporating ethical and sustainability constraints in investment decisions. It highlights the capability of the proposed model to offer a structured approach to ethical investing within the Islamic finance framework. Research limitations/implications While the paper provides a solid foundation for Shariah-compliant portfolio optimization, it acknowledges the complexity and computational demands of the model. Future research could explore simplifying the model without compromising its ethical and Shariah-compliant principles. Originality/value This work introduces a novel integration of Shariah compliance with fuzzy portfolio optimization techniques, addressing the need for dynamic, ethical investment strategies in Islamic finance. The incorporation of purification processes and sustainability constraints into a fuzzy portfolio optimization model represents a unique contribution to the field.