The Benefits of Public and Private Real Estate

There is extant literature showing that private real estate has a major part to play in the mixed-asset portfolio. There is also a good deal of evidence showing that Real Estate Investment Trusts (REITs) make a substantial contribution to the mixed-asset portfolio. But only two studies have explicitly examined what risk/return benefits real estate, public and private, offers the mixed-asset portfolio, i.e. is real estate is a return enhancer, diversifier or both?

However, neither study examined whether real estate, either public or private, offers a benefit to the mixed-asset portfolio if such a portfolio already includes the alternative real estate vehicle. This paper examines this issue using the method suggested by Liang and McIntosh (1999), which decomposes the overall risk-adjusted benefits of an investment to an existing portfolio into its diversification benefits and return benefits.

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