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Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility‐based Framework

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  • Walter I. Boudry
  • Jan A. deRoos
  • Andrey D. Ukhov

Abstract

We study the diversification benefits of REIT preferred and common stock using a utility‐based framework in which investors segment based on risk aversion. We examine optimal mean‐variance portfolios of investors with different levels of risk aversion given access to different classes of assets and establish three main results. First, REIT common stock helps low risk aversion investors attain portfolios with higher returns, while REIT preferred stock helps high risk aversion investors by providing a venue for risk reduction. Second, REIT preferred stock has a risk‐return profile not easily replicated by other asset classes. Finally, conclusions drawn from the empirical analysis are markedly different under these constraints compared to the classical unconstrained setting.

Suggested Citation

  • Walter I. Boudry & Jan A. deRoos & Andrey D. Ukhov, 2020. "Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility‐based Framework," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(1), pages 240-293, March.
    • Handle: RePEc:bla:reesec:v:48:y:2020:i:1:p:240-293
    DOI: 10.1111/1540-6229.12166
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    Cited by:

    1. Gene Birz & Erik Devos & Sandip Dutta & Khoa Nguyen & Desmond Tsang, 2022. "Ex-ante performance of REIT portfolios," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 995-1018, October.
    2. Cherif Famara Badji & Cristiane Benetti & Renato Guimaraes, 2021. "Diversification Benefits of European REIT, Equities and Bonds," Post-Print hal-03592183, HAL.
    3. Mensi, Walid & Gubareva, Mariya & Teplova, Tamara & Kang, Sang Hoon, 2023. "Spillover and connectedness among G7 real estate investment trusts: The effects of investor sentiment and global factors," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    4. Gilles Boevi Koumou, 2020. "Diversification and portfolio theory: a review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 267-312, September.
    5. Randy I. Anderson & Hany Guirguis & Anthony L Loviscek, 2023. "Do Preferred REITs Have Portfolio Enhancement Attributes? An Empirical Investigation," The Journal of Real Estate Finance and Economics, Springer, vol. 67(4), pages 656-672, November.
    6. Keagile Lesame & Elie Bouri & David Gabauer & Rangan Gupta, 2021. "On the Dynamics of International Real Estate Investment Trust Propagation Mechanisms: Evidence from Time-Varying Return and Volatility Connectedness Measures," Working Papers 202152, University of Pretoria, Department of Economics.

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