Impact of Tunisian Political and COVID-19 Crisis on Asset Allocation: Traditional Theory of Portfolio Selection Versus Behavioral Theory

Abstract

Investing in the financial market is a way to grow wealth. This investment undoubtedly generates a return accompanied by a certain level of risk. In finance, risk occupies a crucial place in the stock market. Indeed, it intervenes in the process of choice and selection of the portfolio. Investment decisions can be tricky from time to time and require further thought. The achievement of judicious investment is based on a knowledge of the financial market evolution, the behavior of investors as well as techniques of portfolio management. Multitudes of strategies have been implemented over time to effectively manage the portfolio. Within this framework, various strategies have been implemented such as modern portfolio theory (MPT) and behavioral portfolio theory (BPT). We concentrate on portfolio optimization for two alternative approaches: the MVT and the BPT. This study aims to compare portfolios generated by these two approaches during political and COVID-19 crisis periods using data from the Tunisian stock market exchange for the period 2009 –2022. The results show that in the case of a higher degree of risk aversion induced by investors’ BPT, all the stock is located at the top right of the mean-variance frontier. However, during the crisis, the portfolios selected by rational investors were not systematically selected by irrational investors, even if the optimal portfolio of BPT coincides with the Markowitz efficiency frontier. The results indicate that the crisis induces simultaneously an increase in risk and a sharp decrease in the portfolio return of individuals who follow the mean-variance theory of Markowitz.