Portfolio Construction: A Comparison Between Conventional and Islamic Portfolios During the COVID-19 Pandemic Using the Cut-Off Ratio Model

This study aims to analyze the return and risk of investment portfolios through a comprehensive comparison between conventional and Islamic portfolios in the Malaysian stock market during the COVID-19 pandemic, utilizing the cut-off ratio model. The study relies on the Capital Asset Pricing Model (CAPM) and the Sharpe ratio to evaluate performance, using a random sample of 10 listed companies in the Malaysian stock market — comprising five companies with Sharia-compliant stocks and five conventional companies — during the period from May 1, 2020, to May 1, 2021. The results demonstrated the superiority of the conventional portfolio over the Islamic portfolio, attributed to the impact of the COVID-19 crisis, which led to unprecedented volatility in the financial markets. The conventional portfolio benefited from the flexibility of investment options and its ability to adapt to changing conditions, enabling it to achieve better returns amid challenging economic circumstances. Conversely, the Islamic portfolio was more adversely affected due to Sharia restrictions on certain investments. Based on the empirical findings, our study concluded that understanding the composition of the financial market environment and its conditions forms the foundation for the success of any investment strategy. Furthermore, stock prices on the Malaysian stock exchange do not move randomly but rather exhibit specific trends and patterns. Consequently, the study recommends that investors in the Malaysian market diversify their investments between Islamic and conventional stocks while ensuring that conventional stocks align with Sharia principles to enhance the potential for achieving sustainable returns amid current economic challenges.