Many parents go through this exact situation. It’s so good that you are reading to your daughter and making it part of her bedtime routine. When kids are afraid of something it is important to explore what they're afraid of and why. If having the five year-old in the room sleeping with your two year-old messes up both of the children's routine then we suggest changing or decreasing the behavior.
From what you described, it sounds like reading time happens in a place other than the child's bedroom. Perhaps reading to her in her own bedroom would give her the extra 10 or 15 minutes to get comfortable with her surroundings. Another suggestion would be the increase the amount of time that you spend with her in her room after reading and before turning out the lights. This is something that can gradually decreased if her fears start to subside.
Your daughter is still exploring her world and it's boundaries. She is in a continuous state of learning, and research shows that our brains aren't fully developed until we're in our mid twenties. Her ability to conceptualize and rationalize is not at the same level as an adult. As parents the best thing we can do is teach our children and offer comfort as they try to make sense of everything. As with potty training and feeding, it can take multiple repetitions for a child to understand something. Be consistent and patient. Your daughter will outgrow this!
