Publication

Real estate and portfolio risk: an analysis based on copula functions

2009
Journal Articles

Abstract

This article examines the risk-return trade-off of a mixed-asset portfolio that includes real estate using copula functions. In particular, it analyses the role of direct as opposed to securitised real estate in terms of diversification when the dependence structure is modelled by an appropriate copula. The empirical analysis is conducted using Swiss data for the period 1987–2003. It is shown that a better portfolio diversification is obtained with indirect than with direct real estate. This finding has important practical consequences for asset allocation decisions.

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2009
Journal Articles

Abstract

Official source

Related concepts (32)

Portfolio optimization

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk. Factors being considered may range from tangible (such as assets, liabilities, earnings or other fundamentals) to intangible (such as selective divestment). Modern portfolio theory was introduced in a 1952 doctoral thesis by Harry Markowitz; see Markowitz model.

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In finance, a portfolio is a collection of investments. The term “portfolio” refers to any combination of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio.

Diversification (finance)

In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. If asset prices do not change in perfect synchrony, a diversified portfolio will have less variance than the weighted average variance of its constituent assets, and often less volatility than the least volatile of its constituents.

Related publications (32)

Real estate and portfolio risk: an analysis based on copula functions

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