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Real Estate Portfolio Construction And Estimation Risk

Author

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  • Stephen Lee
  • Simon Stevenson

Abstract

The use of MPT in the construction real estate portfolios has two serious limitations when used in an ex-ante framework: (1) the intertemporal instability of the portfolio weights and (2) the sharp deterioration in performance of the optimal portfolios outside the sample period used to estimate asset mean returns. Both problems can be traced to wide fluctuations in sample means Jorion (1985). Thus the use of a procedure that ignores the estimation risk due to the uncertain in mean returns is likely to produce sub-optimal results in subsequent periods. This suggests that the consideration of the issue of estimation risk is crucial in the use of MPT in developing a successful real estate portfolio strategy. Therefore, following Eun & Resnick (1988), this study extends previous ex-ante based studies by evaluating optimal portfolio allocations in subsequent test periods by using methods that have been proposed to reduce the effect of measurement error on optimal portfolio allocations.

Suggested Citation

  • Stephen Lee & Simon Stevenson, 2000. "Real Estate Portfolio Construction And Estimation Risk," ERES eres2000_070, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2000_070
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2000-070
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    Cited by:

    1. Stephen L. Lee & Simon Stevenson, 2001. "Time Weighted Portfolio Optimisation," ERES eres2001_207, European Real Estate Society (ERES).

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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