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The Stock-REIT Relationship and Optimal Asset Allocations

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  • Doug Waggle
  • Pankaj Agrrawal

Abstract

Executive Summary.In this paper, the marginal effects of changes (due to non-stationarity or estimation errors) in the REIT-stock risk premium and the REIT-stock correlation on the optimal portfolio asset mix of REITs, stocks, and bonds are determined. Employing a mean-variance utility function and considering different levels of investor risk aversion, the findings reveal that the expected return of REITs, relative to that of stocks, is a much more important factor than the REIT-stock correlation in making portfolio decisions. A 1% change in the forecast return for REITs dramatically impacts optimal portfolio allocations for investors of all risk levels. A significant change of 0.1 in the REIT-stock correlation, on the other hand, has only minimal impact on optimal portfolio weights.

Suggested Citation

  • Doug Waggle & Pankaj Agrrawal, 2006. "The Stock-REIT Relationship and Optimal Asset Allocations," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 12(3), pages 209-221, January.
    • Handle: RePEc:taf:repmxx:v:12:y:2006:i:3:p:209-221
    DOI: 10.1080/10835547.2006.12089747
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