The Stock-REIT Relationship and Optimal Asset Allocations

14 Pages Posted: 22 Jun 2015

See all articles by Doug Waggle

Doug Waggle

University of West Florida

Pankaj Agrrawal

University of Maine

Date Written: October 21, 2006

Abstract

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 mean variance 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.

Keywords: optimal REIT portfolio asset allocation, REIT diversification, REIT-stock correlation, REIT portfolio weights

JEL Classification: G

Suggested Citation

Waggle, Doug and Agrrawal, Pankaj, The Stock-REIT Relationship and Optimal Asset Allocations (October 21, 2006). Journal of Real Estate Portfolio Management, Vol. 12, No. 3, 2006, Available at SSRN: https://ssrn.com/abstract=2621150

Doug Waggle

University of West Florida ( email )

11000 University Parkway
Pensacola, FL 32514-5750
United States

Pankaj Agrrawal (Contact Author)

University of Maine ( email )

Orono, ME 04469
United States

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