Testing the statistical significance of real estate in an international mixed asset portfolio
| DOI | https://doi.org/10.1108/14635780410525126 |
| Date | 01 February 2004 |
| Pages | 11-24 |
| Published date | 01 February 2004 |
| Author | Simon Stevenson |
| Subject Matter | Property management & built environment |
Testing the statistical
significance of real estate in an
international mixed asset
portfolio
Simon Stevenson
Graduate School of Business, University College Dublin, Blackrock,
County Dublin, Ireland
Keywords Real estate, Portfolio investment, Performance measurement,
United States of America
Abstract This study re-examines the potential role that direct real estate can play in institutional
mixed-asset portfolios. The paper examines the statistical improvement in performance that can
result from the inclusion of real estate in an international mixed asset portfolio, using both
in-sample and out-of-sample data. Using US real estate data the results provide evidence that in
most cases real estate does not lead to a significant improvement in portfolio performance in
sample. However, out-of-sample tests indicate that the asset does provide a valuable diversification
asset, with significant improvements in performance relative to a base capital market only
portfolio.
Introduction
The analysis of real estate’s role within a mixed-asset portfolio has taken a
number of alternative approaches. Earlier studies tended to examine this issue
from the perspective of an all-domestic portfolio and base the assessment of
real estate’s potential role on the estimated allocations obtained (Fogler, 1984;
Firstenberg et al., 1988; MacGregor and Nanthakumaran, 1992). Such studies
often did not fully address many of the limitations under which a fund manage
would naturally operate and specifically the constraints a manager would
impose on their broad asset allocations. Fund managers will have boundaries
within which their asset allocation decisions are made, with both minimum and
maximum potential allocations in mind. Unconstrained portfolio studies do not
take such behaviour into account, often resulting in unrealistic allocations,
which therefore brings into question the applicability of the findings. Not only
can unrealistic allocations obtained with regard to real estate, but also to other
asset classes within the mixed asset portfolios. An example of this is
international assets. Many early studies examined real estate within a domestic
mixed-asset framework, ther eby excluding the potential div ersification
opportunities available from international asset. However, the unconstrained
inclusion of international asset classes is also unrealistic owing to the presence
of home bias. Home bias refers to the fact that most portfolios are biased in
favor of their domestic assets, therefore, while international assets provide
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Statistical
significance
of real estate
11
Journal of Property Investment &
Finance
Vol. 22 No. 1, 2004
pp. 11-24
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780410525126
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