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Another Take on Real Estate's Role in Mixed†Asset Portfolio Allocations

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  • Joseph L. Pagliari

Abstract

This article examines real estate's role in institutional mixed†asset portfolios using both private†and public†real estate indices, as a means of examining varying real estate†related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest—using infinite†horizon returns and all of the caveats that accompany such a perspective—that real estate allocations of approximately 10–15% of the mixed†asset portfolio represent an upper bound for most investors. For those investors preferring low†risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high†risk portfolios, public real estate (with its embedded leverage of 40–50%) is the vehicle serving this allocation preference—with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate†risk portfolios, an intermediate†leverage approach seems optimal.

Suggested Citation

  • Joseph L. Pagliari, 2017. "Another Take on Real Estate's Role in Mixed†Asset Portfolio Allocations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(1), pages 75-132, February.
  • Handle: RePEc:bla:reesec:v:45:y:2017:i:1:p:75-132
    DOI: 10.1111/1540-6229.12138
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    File URL: https://doi.org/10.1111/1540-6229.12138
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    Cited by:

    1. Massimo Guidolin & Manuela Pedio & Milena Petrova, 2019. "The Predictability of Real Estate Excess Returns: An Out-of-Sample Economic Value Analysis," BAFFI CAREFIN Working Papers 19122, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy & Philippe Bertrand & Jean-Luc Prigent, 2019. "Mixed-asset portfolio allocation under mean-reverting asset returns," Annals of Operations Research, Springer, vol. 281(1), pages 65-98, October.
    3. Restrepo, Hector & Zhang, Weiyi & Mei, Bin, 2020. "The time-varying role of timberland in long-term, mixed-asset portfolios under the mean conditional value-at-risk framework," Forest Policy and Economics, Elsevier, vol. 113(C).
    4. Rob Bauer & Matteo Bonneti & Dirk Broeders, 2018. "Pension Funds Interconnections and Herd Behavior," DNB Working Papers 612, Netherlands Central Bank, Research Department.

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