Role of REIT in a Multi-asset Portfolio

Abstract

There have been a number of studies that have examined the allocation of real estate investment trust security in the mixed asset portfolio, although none of the studies examines conspicuously which are the benefits REITs offer explicitly to the traditional portfolio by combining and considering mean variance theory, capital asset pricing model and different markets. The data for this research are collected from NewYork Univerisity (2014), National Association of REIT (2014), McGraw Hill Financial (2014) and through an interview with the Orava Residential REIT. The research model is developed by following the suggested approaches of Benninga (2008), Palmiter (2003), Shane (2013) and Roychoudhury (2007). The research highlights whether REIT is return enhancer, diversifier, risk hedger or risk enhancer. Major asset classes have been compared to identify the relative advantages of REIT. The research shows that REIT adds significant benefits and risks in a multi-asset portfolio and REIT benefits depend on the alternative asset classes of a multi-asset portfolio. In addition, the benefits of REIT have changed over the years. The research used fictitious portfolios and did not identify the underlying mechanism behind the growth, fluctuations and correlation mechanism of REIT. The future of REIT in a multi-asset portfolio significantly depends on the performance of REIT versus other major asset classes.