RISK AND RETURN IN THE REAL ESTATE, BOND AND STOCK MARKETS

Rafał Wolski

doi:10.1515/remav-2017-0018

Abstract

Abstract Studies investigating the relation between risk and return occupy an important place in the discussion about the effectiveness of investing in real estate. A review of the available studies shows that real estate investments are less profitable than stocks, but in terms of risk and return, are usually the best option. This worldwide regularity may not necessarily be presented in Poland, as the Polish market is not fully fledged yet. The analysis presented in this article was performed with a view to reducing a research gap resulting from the lack of comprehensive Polish studies in this field. In the article, data spanning the years from 2006 to 2016 are examined by means of descriptive statistics, measures of risk, and the analysis of variance (ANOVA) to determine which of the following investment vehicles - bonds, real estate or stocks - offer the best risk-return ratio. The article has two parts. The analytical part is a review of studies on risk measurement methods and of earlier studies investigating risk and return by a class of assets (particularly real estate). In the empirical part, assets are compared with the use of statistical methods. The results of the risk-return analysis point to the money market as the best option for investors. Stocks and real estate ranked second and third, respectively.

Highlights

The globalization of economies, free flows of capital and, last but not least, households’ increasing knowledge of economic issues have caused investors to be increasingly interested in new investment opportunities
The knowledge of how investment vehicles differ in term of risk-return ratios is of practical value for investors, as it provides them with a better insight into the labor market situation
Investors tend to assess investments using criteria such as capital security, liquidity, inflation, nominal interest rates, return, expected dividends, and the likelihood of the invested capital gaining in value, and these factors can be specific to a given country (MCCUE, KLING 1994; TROJANEK 2008; AYODELE, OLALEYE 2015; PAVLOV, et al 2015). All these aspects were addressed in formulating the objective of this article, which seeks to establish which of the three investment vehicles – bonds, real estate and stocks – should be preferred in regards to the risk-return ratio

Summary

Introduction

The globalization of economies, free flows of capital and, last but not least, households’ increasing knowledge of economic issues have caused investors to be increasingly interested in new investment opportunities. A closer analysis of risk-return ratios shows, that real estate is frequently more effective as an investment vehicle than stocks are (see NEWELL, et al 2013). Investors tend to assess investments using criteria such as capital security, liquidity, inflation, nominal interest rates, return, expected dividends, and the likelihood of the invested capital gaining in value, and these factors can be specific to a given country (MCCUE, KLING 1994; TROJANEK 2008; AYODELE, OLALEYE 2015; PAVLOV, et al 2015) All these aspects were addressed in formulating the objective of this article, which seeks to establish which of the three investment vehicles – bonds, real estate and stocks – should be preferred in regards to the risk-return ratio. ANOVA was used in similar studies of the world markets

Measures of investment risk

Studies on the level of risk

Investigation into the levels of risk and return

Methodology

Research results

Conclusions