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Real Estate in the Real World: Dealing with Non-Normality and Risk in an Asset Allocation Model

Real Estate in the Real World: Dealing with Non-Normality and Risk in an Asset Allocation Model Executive Summary. Quantitative models of asset allocation are increasingly used by institutional commercial real estate investors as a guide for investment strategy. Real estate as an asset class, however, does not conform well to many of the assumptions underlying standard mean-variance optimization. This paper outlines a model of allocation that addresses two important “real world” violations of these assumptions. First, the assumption that returns are normally distributed is relaxed; instead, returns are modeled using a distribution that allows for both the “fat-tailed” behavior and skewness seen in asset returns. Second, an alternative to the traditional MPT optimizer is employed—the so called “downside deviation” model—that better reflects the observed behavior of investors. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Real Estate Portfolio Management Taylor & Francis

Real Estate in the Real World: Dealing with Non-Normality and Risk in an Asset Allocation Model

17 pages

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References (19)

Publisher
Taylor & Francis
Copyright
© 2005 American Real Estate Society
ISSN
2691-1205
DOI
10.1080/10835547.2005.12089714
Publisher site
See Article on Publisher Site

Abstract

Executive Summary. Quantitative models of asset allocation are increasingly used by institutional commercial real estate investors as a guide for investment strategy. Real estate as an asset class, however, does not conform well to many of the assumptions underlying standard mean-variance optimization. This paper outlines a model of allocation that addresses two important “real world” violations of these assumptions. First, the assumption that returns are normally distributed is relaxed; instead, returns are modeled using a distribution that allows for both the “fat-tailed” behavior and skewness seen in asset returns. Second, an alternative to the traditional MPT optimizer is employed—the so called “downside deviation” model—that better reflects the observed behavior of investors.

Journal

Journal of Real Estate Portfolio ManagementTaylor & Francis

Published: Jan 1, 2005

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