PurposeIn recent times, behavioural models for asset allocation have been getting more attention due to their probabilistic modelling for scenario consideration. Many investors are thinking about the trade-offs and benefits of using behavioural models over conventional mean-variance models. In this study, the authors compare asset allocations generated by the behavioural portfolio theory (BPT) developed by Shefrin and Statman (2000) against the Markowitz (1952) mean-variance theory (MVT).Design/methodology/approachThe data used have been culled from BRICS countries' major index constituents from 2009 to 2019. The authors consider a single period economy and generate future probable outcomes based on historical data in order to determine BPT optimal portfolios.FindingsThis study shows that a fair number of portfolios satisfy the first entry constraint of the BPT model. BPT optimal portfolio exhibits high risk and higher returns as compared to typical Markowitz optimal portfolio.Originality/valueThe BRICS countries' data were used because the dynamics of the emerging markets are significantly different from the developed markets, and many investors have been considering emerging markets as their new investment avenues.
In this article, the author reminds us again that return mean and variance are not enough. Appropriate investment risk-bearing scales with surplus over future withdrawal commitments, as well as with investment return characteristics. This framework provides for the integration of financial planning and investment decision-making. Its time-varying risk aversion with the ratio of investments to surplus also provides an opportunity for use of dynamic strategies, though speculative bubbles require compensating inputs to avoid excessive allocation extremes. Appropriate risk-bearing can also scale with functions of shortfall probability to deal with time-specific funding requirements. The probability of avoiding shortfall from an initial surplus over longer time horizons may scale close to the square root of time, creating an illusion of time diversification. In contrast, from an initial surplus deficit, minimizing shortfall probability is akin to playing Russian roulette. Allocations based on minimized shortfall probability can be usefully blended with mean–variance allocations, especially for 5- to 15-year time horizons.
