The Role of Risk Measuresí Choices in Ranking Reits: Evidence from the US Market

The increasing role of retail investors in the real estate vehicle market makes necessary to study simple return/risk measures that could be easily understood also by not financial skilled investors. Measures frequently used in the asset management industry are the Risk Adjusted Performance Measures scale independent. Studies available in literature evaluate the fitness of these measures in order to select best investment opportunities under the simplified assumption of the normality of results achieved. Looking at the US market, the paper studies the performance of REITs for the time period 1999-2010 and verifies that the assumption of the normality of the performance achieved is not satisfied. Demonstrated the limits of this assumption, the paper compare ranking based on Sharpe ratio with those achieved using different RAP measure constructed using different risk measures that do not assume the normality of the returnsí distribution. Results demonstrate that rankings obtained different RAP measures are not always coherent even if they are correlated. RAP measures constructed using the maximum drawdown and the VaR risk measures allow to identify rakings that are more stable over time respect to the Sharpe index. Looking at the determinants of the RAP value, both debt and volume variables affect the ranking constructed. For the liabilities the main feature that affect the ranking is the mismatch between short term assets and debts while for the volume the more significant variables are those that consider the volume adjusted for the bid-ask spread. Considering the determinants of the RAP measures, we cannot identify any significant change in the ranking determinants on the basis of the risk measure choice. Finally we evaluate the relevance of the RAP rankings in selecting the investment opportunities comparing the results of a highly diversified portfolio with those achieve by a portfolio concentrated only on top REITS identified using different RAP measure. Results demonstrates that normally the choice to consider more complex RPA measure allow to achieve a significant increase of the performance achieved by a REITsí portfolio.