International Direct Real Estate Asset Allocation Analysis

This paper seeks to demonstrate how two fuzzy mathematical programming models, namely, the flexible and robust models can be used to represent expert judgement in the asset allocation decision involving Singapore stocks and real estate assets. Expert judgement is usually constrained by the fact that the confidence of the judgement can be improved only at the expense of precision. This uncertainty which is attributable to the vagueness of information and imprecision can be quantified by fuzzy set theory. Hence, incorporating fuzzy set theory into Markowitz's Quadratic Programming model will provide asset allocators with a more intuitive and natural way of capturing expert judgement in asset optimization. The study also compares the performance of the fuzzy optimization models and the classical Markowitz model. Results of the study indicate no inconsistency in the risk-return trade-off for the models. It is anticipated that fuzzy models will be accepted and emerge as effective extensions of the classical one.Fuzzy set theory is an old method, and when mentioning its using in the asset allocation area, many people laugh at it. The reason is what? Not because not many people use it in asset allocation decision making, but because it can solve some traditional models' shortcomings.