Portfolio Diversification Benefits Using Real Estate Investment Trusts An Experiment with US Common Stocks, Equity Real Estate Investment Trusts, and Mortgage Real Estate Investment Trusts

Rafiq Bhuyan, James Kuhle, Talla Mohammed Al-Deehani and Munir Mahmood
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Rafiq Bhuyan: Department of Finance, College of Business and Economics, American University of Kuwait, Safat 13034, Kuwait
James Kuhle: Department of Finance, College of Business Administration, California State University Sacramento, CA, USA,
Talla Mohammed Al-Deehani: Department of Finance and Financial Institutions, College of Business Administration, Kuwait University, Kuwait,
Munir Mahmood: Department of Mathematics and Natural Sciences, Gulf University for Science and Technology, Hawally 32093, Kuwait

International Journal of Economics and Financial Issues, 2015, vol. 5, issue 4, 922-928

Abstract: Using recent data (2002-2012) from the US financial markets, we study the magnitude and benefits of Real Estate Investment Trust (REIT) and common stock in portfolio diversification. In particular, we examine the effects of risk-reduction benefits through diversifying among common stocks via Equity REITs (EREITs) and Mortgage REITs (MREITs). In addition, overall performance measures are calculated and compared among REIT, common stock and mixed-asset portfolios. We observe that investors can benefit from diversification using EREITs but not MREITs. In fact, MREITs turn out to be the worst asset class to be in diversifying portfolio. This conclusion is in contrast with Kuhle (1987) who claims improvement of portfolio risk reduction with MREITs. Our finding, however, is consistent with Hartzell et al. (1986) and Chen et al. (2005). Finally, even though our data period consists one of the historic collapses of real estate market in the US, it still indicates the EREITs still offers diversification benefits. It provides evidence that small investors can use EREITs to diversify their risks. It also offers an opportunity to earn return on real estate investments without investing in real estate properties which may be beyond investor's capacity.

Keywords: Portfolio Diversification; Risk; Equity Real Estate Investment Trusts; Mortgage Real Estate Investment Trusts (search for similar items in EconPapers)
JEL-codes: D53 G11 R30 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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