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Paper eres2011_150:
Diversification of portfolio risk: reconciling theory and observed weightings

id eres2011_150
authors Jackson, Cath
year 2011
title Diversification of portfolio risk: reconciling theory and observed weightings
source 18th Annual European Real Estate Society Conference in Eindhoven, the Netherlands
summary During the 1990s and early 2000s a body of literature emerged that explores and seeks to improve property portfolio risk diversification strategies. The studies were motivated by the view that strategies commonly used are suboptimum because of the reliance, due to data availability, on political administrative regions to represent asset classes. Asset classes should comprise homogeneous assets, with comparable (if not identical) risk and return profiles. This enables investors to follow the diversification principles set out by Markowitz (1952). However, political administrative regions are not based on property market fundamentals, nor, indeed, economic fundamentals in most cases, but on historic and governmental factors. Individual regions may contain, for example, both urban and rural areas; prospering and declining areas; and manufacturing and service employment centres. Looking to the fundamentals of property market performance, these contrasting characteristics underpin differential investment outcomes. These studies have consistently challenged the use of administrative regions by investors for the diversification of risk, finding local area characteristics and property market fundamentals as important in portfolio strategy. The focus of the paper is to re-evaluate these studies, now that sufficient time has passed for data to become available to assess what would have happened if investors had followed the diversification strategies suggested. A sample of 73 local markets is analysed using total returns data from IPD’s UK Key Centres 2008 report, reflecting institutional property investment trends and market performance over the ten year period 1998-2007. Efficient frontiers are developed that enable evaluation of the opportunities presented by the classifications of local markets and, in addition, sectoral and regional market segregation. The optimal weightings suggested by the classifications are compared to actual aggregate institutional investment weightings. The differences in allocation are explored. The analysis is then extended to cover different phases of market performance.
keywords real estate diversification benefits, institutional investment, observed weightings
series ERES:conference
email c.c.jackson@sheffield.ac.uk
content file.ppt (1,007,104 bytes)
discussion No discussions. Post discussion ...
ratings
session B1: Finance and Investment (II), Diversification Benefits
last changed 2011/06/23 16:27
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