Balanced investment portfolio in Malaysia

Decoding Investment: Is Markowitz's Model Still King in Today's Stock Market?

Theo Raines in Business & Economy December 2025 • 4 min read.

"A simplified guide to portfolio selection strategies in the Malaysian stock market, comparing classic and modern approaches for everyday investors."

In the world of investing, making smart choices can seem like navigating a maze. With so many options, strategies, and opinions, it's easy to feel lost. But don't worry, understanding the basics of portfolio selection doesn't require a finance degree. This article breaks down two popular models used to construct an investment portfolio.

The Markowitz Model, a cornerstone of modern portfolio theory, and the Single-Index Model, a streamlined alternative, offer different approaches to managing risk and maximizing returns. We'll explore these models, focusing on how they apply to the Malaysian stock market. You'll get clear, practical insights to help you make confident investment decisions.

Whether you're just starting out or looking to refine your investment strategy, this guide is designed to provide you with valuable knowledge and actionable steps. Let’s dive into the world of portfolio selection and discover how these models can help you achieve your financial goals.

What are the Core Concepts of Markowitz Portfolio Theory?

Balanced investment portfolio in Malaysia

Harry Markowitz's model, introduced in 1952, revolutionized finance by providing a mathematical approach to portfolio selection. This model helps investors determine the best mix of investments to achieve optimal returns for a given level of risk. The Markowitz Model requires three key pieces of information:

To determine a series of plausible investment portfolios, all statistical inputs need to be accounted for. Each solution also gives exact portfolio weightings for the investment candidates in that solution. The model assumes that each investment opportunity is a probability distribution of returns measured over the same holding period. Another assumption is that investor risk estimates are proportional to the variance of returns.

Expected Return: The anticipated profit or loss on an investment.
Standard Deviation: A measure of the volatility or risk associated with an investment’s returns.
Correlation Coefficients: How the returns of different investments move in relation to each other.

The Markowitz Model helps investors find the balance between risk and return, leading to a diversified portfolio. This diversification reduces the impact of any single investment on the overall portfolio performance. The Markowitz model is grounded in four assumptions to establish a robust and operational framework:

Investors analyze each investment alternative by considering the probability distribution.
Investors gauge the risk of a security portfolio based on the variance or standard deviation of the expected return.
Decisions made by investors are rooted in the assessment of risks and returns.
Investors exhibits a preference for minimized risk.

Choosing the Right Model for You: A Practical Guide

Both the Markowitz Model and the Single Index Model offer valuable frameworks for portfolio selection. While the Markowitz Model provides a more comprehensive analysis, it requires more data and can be complex to implement. The Single Index Model offers a simpler, more practical approach, especially for investors with limited resources or those managing smaller portfolios. Ultimately, the choice between the two models depends on your individual needs, resources, and investment goals. Diversification remains a cornerstone of sound investment strategy, and both models can help you achieve a well-balanced portfolio tailored to your specific circumstances.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2401.05264,

Title: Comparison Of Markowitz Model And Single-Index Model On Portfolio Selection Of Malaysian Stocks

Subject: q-fin.pm

Authors: Zhang Chern Lee, Wei Yun Tan, Hoong Khen Koo, Wilson Pang

Published: 10-01-2024

Everything You Need To Know

What is the primary goal of the Markowitz Model?

The primary goal of the Markowitz Model is to help investors determine the best mix of investments to achieve optimal returns for a given level of risk. It provides a mathematical approach to portfolio selection, assisting in balancing risk and return to create a diversified portfolio. This model, introduced by Harry Markowitz, uses expected return, standard deviation, and correlation coefficients to construct efficient portfolios that minimize risk for a specific return level, or maximize returns for a specific risk level. The model also involves analyzing probability distribution, risk assessment based on variance or standard deviation, and investor preferences for minimized risk.

What are the key differences between the Markowitz Model and the Single-Index Model?

The Markowitz Model offers a comprehensive analysis of portfolio selection, but it requires more data and can be complex to implement. It uses expected return, standard deviation, and correlation coefficients. In contrast, the Single-Index Model provides a simpler, more practical approach, especially for investors with limited resources or those managing smaller portfolios. The Single Index Model is streamlined. Both models, however, aim to help investors achieve a well-balanced portfolio tailored to their circumstances. The choice between the two models depends on individual needs, resources, and investment goals. Markowitz model is more detailed and uses more complex calculations as compared to the Single Index model.

How does diversification play a role in the Markowitz Model?

Diversification is a cornerstone of the Markowitz Model. By considering how the returns of different investments move in relation to each other (correlation coefficients), the model helps investors create a diversified portfolio. This diversification reduces the impact of any single investment on the overall portfolio performance. The Markowitz Model is designed to find the balance between risk and return, leading to a portfolio that mitigates risk through the inclusion of various assets with different risk profiles. This helps in lowering the overall portfolio volatility.

What are the main assumptions underlying the Markowitz Model?

The Markowitz Model is grounded in four key assumptions to establish a robust and operational framework. First, investors analyze each investment alternative by considering the probability distribution. Second, investors gauge the risk of a security portfolio based on the variance or standard deviation of the expected return. Third, decisions made by investors are rooted in the assessment of risks and returns. Finally, investors exhibit a preference for minimized risk. These assumptions help to simplify the investment process and create a structured approach to portfolio selection.

How can investors use the Markowitz Model to make confident investment decisions in the Malaysian stock market?

Investors in the Malaysian stock market can use the Markowitz Model by first gathering the necessary data: expected returns, standard deviations, and correlation coefficients for potential investments. They can then use the model to determine the optimal portfolio allocations that balance risk and return. The model helps in creating a diversified portfolio, which reduces the impact of any single investment on the overall performance. By understanding these key elements, investors can make more informed decisions, manage risk effectively, and work towards achieving their financial goals in the Malaysian stock market. It provides a structured approach to portfolio selection, leading to more confident investment strategies.