Real Estate Vs Stock Market: Approaching The Value Creation Through The Treynor And Black Model

Real estate should be part of any well diversified portfolio. Its inclusion in an efficient portfolio is justified by its expected return and its risk features, among which it becomes remarkable their low correlation with financial assets, especially with common stock. Nevertheless, its low liquidity when compared with financial assets, its operating and transaction costs require that real estate enables investors to expect an alpha that absorbs these specific costs. On this basis we apply the Treynor and Black model to study their proportion in a portfolio constituted by real estate and common stocks. This model analyses the optimal combination between undervalued assets and the market index. The proportion of real estate in the new portfolio can be studied as the outcome of the combination between its own features and the properties of the market index. We perform a sensitivity analysis between the values of real estate weight and its alpha, which, after realizing that the specific risk of real estate is among the independent variables, gives way to a new relationship between the real estate proportion and its appraisal ratio. Next, we study the value created by the resulting new portfolio between real estate and the market index. The Sharpe ratio on the new portfolio is a function of the appraisal ratio of real estate, and, on this basis, we analytically relate the value created by the new portfolio to the appraisal ratio and the Sharpe ratio of the market index. Finally, we focus on the negative effect of the lack of divisibility of real estate on value creation and on securitization as a way to overcome it.