Abstract
This study explores the role of pension‐plan real estate investment in an asset–liability framework. By assuming that the pension‐plan manager wishes to have assets of at least equal value to the liabilities at all points in time, an asset selection process is derived which depends on both the asset's covariance with other assets and its covariance with the liability stream. We generally find real estate not to be highly correlated with pension‐plan liabilities. This finding is of general interest, since it helps to explain why pension‐plan real estate investment is extremely limited and much smaller than one would expect if pension‐plan investors cared only about the mean and variance of the real return to their invested wealth.
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