Real Estate Betas and the Implications for Asset Allocation

Posted: 9 Mar 2018

Date Written: March 5, 2018

Abstract

Real estate is an important asset class, but what specifically does real estate contribute to improve diversified stock–bond portfolios? The author decomposes real estate investment trust returns into their factor betas to show that real estate is a hybrid asset class, with returns explained by a rich mix of compensated risk factors plus uncompensated sector risk. He shows that the same is true for private real estate, but with the additional contribution to risk from misappraisals. It is the rich mix of common factors contained in real estate that can improve the Sharpe ratios of diversified, multiasset portfolios. He discusses the implications for asset allocation from the perspectives of mean–variance optimization of asset classes, the capital asset pricing model with efficient markets, and factor-based asset allocation.

Keywords: Real estate, common risk factors, asset allocation

JEL Classification: G11, G12

Suggested Citation

Mladina, Peter, Real Estate Betas and the Implications for Asset Allocation (March 5, 2018). Journal of Investing, Vol. 27, No. 1, 2018, Available at SSRN: https://ssrn.com/abstract=3134732

Peter Mladina (Contact Author)

Northern Trust ( email )

2049 Century Park East
Suite 3600
Los Angeles, CA 90067
United States

UCLA ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

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