Risk–Return Efficiency in Emerging Dual Financial Markets: A Comparative Study of Markowitz Mean–Variance and Sharpe Single-Index Portfolio Models in Malaysia

This study examines the comparative efficiency of the Markowitz mean–variance model and the Sharpe single-index model in constructing optimal portfolios within the Malaysian capital market, which operates under a dual conventional–Islamic framework. Using weekly adjusted prices of forty securities across the banking, plantation, telecommunications, and technology sectors from 2018 to 2023, the research investigates risk–return trade-offs and portfolio performance across diversification strategies. The Markowitz model generated efficient frontiers that balanced high-return technology and banking stocks with low-volatility plantation and telecommunications securities, resulting in portfolios with superior Sharpe ratios and positive Jensen alphas. By contrast, the Sharpe single-index model simplified computation by ranking securities through excess return-to-beta ratios but produced concentrated portfolios dominated by high-beta sectors, yielding slightly higher Treynor ratios but weaker diversification. Findings demonstrate that institutional investors are better served by the Markowitz framework due to its risk-adjusted advantages, while retail investors may prefer the simplicity of the Sharpe approach despite higher exposure to sectoral shocks. The study contributes to portfolio theory by contextualizing classical models within an emerging dual financial system and offers practical implications for investor education, regulatory policy, and Shariah-compliant investment strategies.