Portfolio Theory and Property in a Multi-Asset Portfolio

Colin A. Jones () and Edward Trevillion ()
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Colin A. Jones: Heriot-Watt University
Edward Trevillion: Heriot-Watt University

Chapter Chapter 7 in Real Estate Investment, 2022, pp 129-155 from Springer

Abstract: Abstract Most of the commercial properties held as an investment are wrapped up in funds, large and small. Because of this, no study of commercial property investment is complete without an examination of the benefits and characteristics of holding property in these bundles of investments or portfolios. This chapter outlines the components of risk in a portfolio and how risk can be reduced by diversification. It examines the application of Modern Portfolio Theory (MPT) to property and its development in recent decades. The fundamental principle of MPT is that the risk-return attributes of individual investments are important not so much independently but in the way they contribute to the risk and return of the portfolio overall. This chapter also looks at the Capital Asset Pricing Model (CAPM) as a way of assessing returns as a function of market risk. Like MPT, the model was developed with financial markets in mind but has been adapted for use for property markets with some reservations. This chapter finishes by reprising the case for real estate in multi-asset portfolios, and the practicalities of building and holding real estate in real estate only and multi-asset portfolios.

Keywords: Risk reduction; Diversification; Portfolios; Modern portfolio theory; Post-modern portfolio theory; Capital Asset Pricing Model (CAPM); Efficient frontier; Multi-asset portfolios; Beta; Lines of indifference; Property as inflation hedge (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-3-031-00968-6_7

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