Modern Portfolio Theory as Applied to REITs

Abstract

In the 1960s the legislative framework for REITs was established to allow the investing public to benefit from investments in large-scale real estate enterprises. REITs typically offer superior dividend income along with the potential for capital gains to investors. There is also a great deal of work that describes the diversification benefits provided by REITs to an investor’s portfolio. Our paper highlights the prospects for value added and portfolio construction within REITs themselves. In this endeavor we discuss a framework to review any investment strategy, review an investment strategy for selecting among REITs, and finally illustrate the principal impediment to such a strategy.

Keywords: REIT, Portfolio, Theory, Valuation, Investment, Strategy

JEL Classification: G12, G14