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Diversification Benefits from European Direct Real Estate Investment with a Special Focus on the German Market

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  • Kristin Wellner
  • Matthias Thomas

Abstract

Besides the specific return and risk variables of individual assets within a portfolio the correlation of returns between the individual assets are of relevance for the portfolio risk. Capital market theory suggests that diversification effects develop from return correlations with a correlation coefficient of lower than 1. Through the separation of systematic and unsystematic risk in a portfolio the combination of two assets with returns not completely positive correlated results in a risk reduction. Systematic risk represents the market risk, which affects equally all assets on all markets considered. Consequently, it can not be diversified away by spreading risk. Unsystematic risk, however, affects only specific assets, asset classes or homogenous sub-markets. It is related to the individual assets and with that the risk of the total portfolio may be balanced by a spreading different assets and their returns correlating as negative as possible. As shown in the graph below it decreases with an increasing number of assets in a portfolio.

Suggested Citation

  • Kristin Wellner & Matthias Thomas, 2004. "Diversification Benefits from European Direct Real Estate Investment with a Special Focus on the German Market," ERES eres2004_231, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2004_231
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    References listed on IDEAS

    as
    1. Glenn R. Mueller, 1993. "Refining Economic Diversification Strategies for Real Estate Portfolios," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 55-68.
    2. Piet Eichholtz & Ronald Huisman & Kees Koedijk & Lisa Schuin, 1998. "Continental Factors in International Real Estate Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 493-509, September.
    3. William N. Goetzmann & Susan M. Wachter, 1995. "Clustering Methods for Real Estate Portfolios," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(3), pages 271-310, September.
    4. Emil E. Malizia & Robert A. Simons, 1991. "Comparing Regional Classifications for Real Estate Portfolio Diversification," Journal of Real Estate Research, American Real Estate Society, vol. 6(1), pages 53-78.
    5. repec:eme:jpvi00:14635789510146596 is not listed on IDEAS
    6. David J. Hartzell & David G. Shulma & Vice President, 1987. "Refining the Analysis of Regional Diversification for Income-Producing Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 85-95.
    7. Glenn R. Mueller & Barry A. Ziering, 1992. "Real Estate Portfolio Diversification Using Economic Diversification," Journal of Real Estate Research, American Real Estate Society, vol. 7(4), pages 375-386.
    8. Joseph Rabianski & Ping Cheng, 1997. "Intrametropolitan Spatial Diversification," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 3(2), pages 117-128, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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