Abstract
This paper re-examines the performance of REITs, stocks, and fixed-income assets based on the preferences of risk-averse and risk-seeking investors using mean-variance and stochastic dominance approaches. Our findings indicate no first-order stochastic dominance and no arbitrage opportunity among these assets. However, our stochastic dominance results reveal that in order to maximize their expected utility, the risk-averse prefer fixed-income assets over real estate, which, in turn, is preferable to stocks. On the other hand, to maximize their expected utility, all risk-seeking investors would prefer to invest in stocks than in real estate, but real estate, in turn, is preferable to fixed-income assets.
Highlights
The collapse of the dot-com mania in 2000 led investors to reshape their market expectations
The reverse holds true for risk-seekers. These results reveal that to maximize their expected utility, all risk-averse investors would prefer to invest in real estate than in the stock market
Applying the MV criterion, we find that all real estate investment trusts (REITs) dominate the three stock indices but not the Treasury constant maturities
Summary
The collapse of the dot-com mania in 2000 led investors to reshape their market expectations. The portfolio’s true riskiness will be underestimated This motivates us to conduct a statistical analysis to evaluate REITs against stocks and fixed-income assets by considering the effect of the higher moments of the returns. We re-examine market efficiency and the behavior of risk-averters and risk-seekers via a stochastic dominance (SD) approach by using the whole distribution of returns from these assets To our knowledge, this is the first paper that uses SD techniques to analyze real estate returns. These results reveal that to maximize their expected utility, all risk-averse investors would prefer to invest in real estate than in the stock market. To maximize their expected utility, all risk-seeking investors would prefer to invest in stocks than in real estate, which, in turn, is preferable to fixed-income assets.
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