Diversifying in Public Real Estate: The Ex-Post Performance
Journal of Asset Management, Forthcoming
Posted: 16 Jan 2008
Date Written: January 12, 2008
We calculate the ex-post, realized portfolio performance for an investor who diversifies among U.S. stocks, bonds, real estate indirect investment vehicles (E-REITS), and cash. Simulations are performed for two alternative asset allocation frameworks - classical and Bayesian - and for scenarios involving two different samples and six different investment horizons. Interestingly, the ex-post welfare cost of restricting portfolio choice to traditional financial assets (i.e., stocks, bonds, and cash) only is found to be positive in all scenarios for a Bayesian investor. On the contrary, substitution of E-REITS for stocks in optimal portfolios turns out to reduce ex-post portfolio performance over the nineties and for a Classical investor who ignores parameter estimation uncertainty.
Keywords: Optimal asset allocation; Real estate; Parameter uncertainty; Out-of-sample performance
JEL Classification: G11, L85
Suggested Citation: Suggested Citation