Portfolio optimisation of international real estate investment trusts market during COVID-19: A behavioural perspective

This paper employs the cumulative prospect theory to investigate how deviation from rational investor asset selection improves portfolio optimisation. Firstly, asset portfolios are constructed by utilising the cumulative prospect theory, which captures investors' psychology and risk tolerance and is herein referred to as a behavioural portfolio (BF). Secondly, the cluster technique is also used to build behavioural-centred investment portfolios that capture all the relevant moment properties of the asset return distribution as well as investors' psychological dynamics and risk appetite, herein called the cluster moment behavioural portfolio (CMBF). The constructed portfolios are optimised by copula and differential evolution techniques. The analysis of optimisation of the constructed portfolios indicates that for behavioural portfolios (BF), in all phases of our sample period, portfolios with higher behavioural scores outperformed those with lower behavioural scores. And in the cluster moment behavioural portfolio (CMBP), for the pre-COVID and the COVID phases, the portfolios with lower behavioural scores outperform those with higher behavioural scores; however, for the full sample phase, the portfolio with a higher behavioural score outperforms the portfolio with the lower behavioural scores. The optimisation results of all the constructed portfolios largely favour portfolios with higher behavioural scores over those with lower scores. The results offer investment suggestions to guide investors with varying risk tolerance levels and those who deviate from the rational investor on how they can enhance their portfolio optimisation.