Friday, October 12, 2007

The Stock–REIT Relationship and Optimal Asset Allocations

The Stock–REIT Relationship and Optimal Asset Allocations

Doug Waggle, and Pankaj Agrrawal, Journal of Real Estate Portfolio Management, (Volume 12, Number 3, 2006)

Executive Summary.

In this paper, the marginal effects of changes (due to non-stationarity or estimation errors) in the REIT-stock risk premium and the REIT-stock correlation on the optimal portfolio asset mix of REITs, stocks, and bonds are determined. Employing a meanvariance utility function and considering different levels of investor risk aversion, the findings reveal that the expected return of REITs, relative to that of stocks, is a much more important factor than the REIT-stock correlation in making portfolio decisions. A 1% change in the forecast return for REITs dramatically impacts optimal portfolio allocations for investors of all risk levels. A significant change of 0.1 in the REIT-stock correlation, on the other hand, has only minimal impact on optimal portfolio weights.

Securitized Real Estate and its Link With Financial Assets and Real Estate: An International Analysis

Hoesli, Martin and Serrano Moreno, Camilo, (April 2006)

This paper provides cross-country evidence of the link between securitized real estate and stocks, bonds, and direct real estate. First, we investigate the behavior of betas in 16 countries and identify the causes of their variation. Second, securitized real estate returns are regressed on "pure" stock, bond and real estate factors. The betas are generally found to decrease over the 1990-2004 period, but the causes for such decline differ across countries. Securitized real estate returns are found to be positively associated with stock and direct real estate returns, but negatively related to bond returns. Financial assets contribute greatly to the variance of securitized real estate, while the impact of direct real estate is limited. However, a large fraction of the variance is not accounted for by these factors, especially in the U.S., suggesting that other factors are at play.

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