Revisiting Markowitz's Mean Variance analysis: A review from shariah perspective

The analysis on the portfolio theory doubtfully complies with shariah. Therefore, this paper presented a review to the Markowitz's Mean Variance Model (Portfolio Theory) and discussed the fundamentals underlying the model in term of shariah compliances. First, the assumptions of Markowitz's model were revised in term of compliances with shariah and the appropriate modifications were discussed that lead to the variation of efficient frontier and the characteristic of return and risk. Intriguingly, the principles of Islamic finance do agree with many conventions underlying the model. However, it was uncovered that Islamic variables such as prohibition of short selling, purification and zakat, should be integrated in the model. Lastly, the study presented empirical results on the new Islamic mean variance analysis in term of the resulting efficient frontier. In conclusion, a new revised mean-variance analysis should overcome the gap in conventional tools in measuring risk and returns and making decision on the choice of investments according to shariah.