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Publisher: University of Reading
Languages: English
Types: Book
The reduction of portfolio risk is important to all investors but is particularly important to real estate investors as most property portfolios are generally small. As a consequence, portfolios are vulnerable to a significant risk of under-performing the market, or a target rate of return and so investors may be exposing themselves to greater risk than necessary. Given the potentially higher risk of underperformance from owning only a few properties, we follow the approach of Vassal (2001) and examine the benefits of holding more properties in a real estate portfolio. Using Monte Carlo simulation and the returns from 1,728 properties in the IPD database, held over the 10-year period from 1995 to 2004, the results show that increases in portfolio size offers the possibility of a more stable and less volatile return pattern over time, i.e. down-side risk is diminished with increasing portfolio size. Nonetheless, increasing portfolio size has the disadvantage of restricting the probability of out-performing the benchmark index by a significant amount. In other words, although increasing portfolio size reduces the down-side risk in a portfolio, it also decreases its up-side potential. Be that as it may, the results provide further evidence that portfolios with large numbers of properties are always preferable to portfolios of a smaller size. \ud
  • The results below are discovered through our pilot algorithms. Let us know how we are doing!

    • Brown, G.R. (1988) Reducing the Dispersion of Returns in UK Real Estate Portfolios, Journal of Valuation, 6, 2, 127-147.
    • Brown, G.R. (1991) Property Investment and the Capital Markets, E. & F.N. Spon, London.
    • Brown, G.R. and Matysiak, G.A. (2001) Real Estate Investment: A Capital Market Approach, Financial Times Prentice Hall, London Byrne, P. and Lee, S.L. (2003) An Exploration of the Relationship between Size, Diversification and Risk in UK Real Estate portfolio: 1989-1999, Journal of Property Research, 20, 2, 191-206
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