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

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  • Mark Coleman
  • Asieh Mansour

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.

Suggested Citation

  • Mark Coleman & Asieh Mansour, 2005. "Real Estate in the Real World: Dealing with Non-Normality and Risk in an Asset Allocation Model," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 11(1), pages 37-53, January.
    • Handle: RePEc:taf:repmxx:v:11:y:2005:i:1:p:37-53
    DOI: 10.1080/10835547.2005.12089714
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