The Return Due to Diversification of Real Estate to the US Mixed-Asset Portfolio | Zendy

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The Return Due to Diversification of Real Estate to the US Mixed-Asset Portfolio

Author(s) -

Stephen Lee

Publication year - 2003

Publication title -

citeseer x (the pennsylvania state university)

Language(s) - English

Resource type - Conference proceedings

DOI - 10.15396/eres2003_197

Subject(s) - portfolio , diversification (marketing strategy) , real estate , alternative asset , asset allocation , business , capitalization rate , financial economics , asset (computer security) , rate of return , estate , real estate investment trust , economics , finance , computer science , marketing , computer security

Booth and Fama (1992) observe that the compound return and so the terminal wealth of a portfolio is greater than the weighted average of the compound returns of the individual investments, a difference referred to as the return due to diversification (RDD). Thus assets that offer high RDD should be particularly attractive investments. This paper test the proposition that US direct real estate is such an asset class using annual data over the period 1951-2001. The results show that adding real estate to an existing mixed-asset portfolio increases the compound return and so the terminal wealth of the fund. However, the results are dependent on the percentage allocation to real estate and the asset class replaced.

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