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Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value
Author(s) -
Fugazza Carolina,
Guidolin Massimo,
Nicodano Giovanna
Publication year - 2009
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2009.00245.x
Subject(s) - sharpe ratio , economics , diversification (marketing strategy) , real estate investment trust , alternative investment , portfolio , financial economics , real estate , asset allocation , equity (law) , econometrics , estate , investment strategy , monetary economics , finance , business , market liquidity , marketing , law , political science
Welfare gains to long‐horizon investors may derive from time diversification that exploits nonzero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long‐horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in‐sample experiments. This article evaluates, ex post, the out‐of‐sample gains from diversification when equity real estate investment trusts (REITs) belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However, the out‐of‐sample average Sharpe ratio and realized expected utility of long‐horizon portfolios are frequently lower than that of a one‐period portfolio, which casts doubt on the value of time diversification.