The Changing Benefit of REITs to the Mixed-Asset Portfolio

Abstract

Executive Summary. A number of studies have examined the allocation of public real estate securities (REITs) in the mixed-asset portfolio. Yet no study has explicitly examined what benefits REITs offer to the traditional capital market mixed-asset portfolio (i.e., whether REITs are a return enhancer, diversifier, or both). This paper examines this issue using the method suggested by Liang and McIntosh (1999), which decomposes the overall risk-adjusted benefits of an investment to an existing portfolio into its diversification benefits and return benefits. The results show that REITs offer different benefits to different asset classes and the mixedasset portfolio and that these benefits have changed over time. Thus, whether REITs can have a place in any future mixed-asset portfolio largely depends on the relative return performance of REITs versus the alternative asset classes within the mixed-asset portfolio.