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Portfolio Diversification Benefits Using Real Estate Investment Trusts An Experiment with US Common Stocks, Equity Real Estate Investment Trusts, and Mortgage Real Estate Investment Trusts

Author

Listed:
  • Rafiq Bhuyan

    (Department of Finance, College of Business and Economics, American University of Kuwait, Safat 13034, Kuwait)

  • James Kuhle

    (Department of Finance, College of Business Administration, California State University Sacramento, CA, USA,)

  • Talla Mohammed Al-Deehani

    (Department of Finance and Financial Institutions, College of Business Administration, Kuwait University, Kuwait,)

  • Munir Mahmood

    (Department of Mathematics and Natural Sciences, Gulf University for Science and Technology, Hawally 32093, Kuwait)

Abstract

Using recent data (2002-2012) from the US financial markets, we study the magnitude and benefits of Real Estate Investment Trust (REIT) and common stock in portfolio diversification. In particular, we examine the effects of risk-reduction benefits through diversifying among common stocks via Equity REITs (EREITs) and Mortgage REITs (MREITs). In addition, overall performance measures are calculated and compared among REIT, common stock and mixed-asset portfolios. We observe that investors can benefit from diversification using EREITs but not MREITs. In fact, MREITs turn out to be the worst asset class to be in diversifying portfolio. This conclusion is in contrast with Kuhle (1987) who claims improvement of portfolio risk reduction with MREITs. Our finding, however, is consistent with Hartzell et al. (1986) and Chen et al. (2005). Finally, even though our data period consists one of the historic collapses of real estate market in the US, it still indicates the EREITs still offers diversification benefits. It provides evidence that small investors can use EREITs to diversify their risks. It also offers an opportunity to earn return on real estate investments without investing in real estate properties which may be beyond investor's capacity.

Suggested Citation

  • Rafiq Bhuyan & James Kuhle & Talla Mohammed Al-Deehani & Munir Mahmood, 2015. "Portfolio Diversification Benefits Using Real Estate Investment Trusts An Experiment with US Common Stocks, Equity Real Estate Investment Trusts, and Mortgage Real Estate Investment Trusts," International Journal of Economics and Financial Issues, Econjournals, vol. 5(4), pages 922-928.
    • Handle: RePEc:eco:journ1:2015-04-11
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    References listed on IDEAS

    as
    1. Yen-Hsien Lee, 2014. "An international analysis of REITs and stock portfolio management based on dynamic conditional correlation models," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(2), pages 165-180, May.
    2. Jamie Alcock & John Glascock & Eva Steiner, 2013. "Manipulation in U.S. REIT Investment Performance Evaluation: Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 434-465, October.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. Jeffrey Fisher & William Goetzmann, 2005. "The Performance of Real Estate Portfolios: A Simulation Approach," Yale School of Management Working Papers ysm456, Yale School of Management, revised 01 Jun 2005.
    5. David Hartzell & John Hekman & Mike Miles, 1986. "Diversification Categories in Investment Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(2), pages 230-254, June.
    6. James L. Kuhle, 1987. "Portfolio Diversification and Return Benefits--Common Stock vs. Real Estate Investment Trusts (REITs)," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 1-9.
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    Cited by:

    1. Roberto Joaquín Santillán-Salgado & Humberto Valencia-Herrera, 2019. "The Real Estate Investment Trust Industry and the Financial Crisis: Modeling Volatility (1985-2016)," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 14(2), pages 169-188, Abril-Jun.
    2. Cohen Viktorija & Burinskas Arūnas, 2020. "The Evaluation of the Impact of Macroeconomic Indicators on the Performance of Listed Real Estate Companies and Reits," Ekonomika (Economics), Sciendo, vol. 99(1), pages 79-92, June.
    3. Essafi Zouari Yasmine & Nasreddine Aya & Simon Arnaud, 2020. "The Role of Housing in a Mixed-Asset Portfolio: The Particular Case of Direct Housing within the Greater Paris Region," Working Papers hal-02537087, HAL.

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    More about this item

    Keywords

    Portfolio Diversification; Risk; Equity Real Estate Investment Trusts; Mortgage Real Estate Investment Trusts;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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