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A Heuristic Downside Risk Approach to Real Estate Portfolio Structuring: a Comparison Between Modern Portfolio Theory and Post Modern Portfolio Theory
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.
2011 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Portfolio diversification has been a subject frequently addressed since the publications of Markowitz in 1952 and 1959. However, the Modern Portfolio Theory and its mean variance framework have been criticized. The critiques refer to the assumptions that return distributions are normally distributed and the symmetric definition of risk. This paper elaborates on these short comings and applies a heuristic downside risk approach to avoid the pitfalls inherent in the mean variance framework. The result of the downside risk approach is compared and contrasted with the result of the mean variance framework. The return data refers to the real estate sector in Sweden and diversification is reached through property type and geographical location. The result reveals that diversification is reached differently between the two approaches. The downside risk measure applied here frequently diversifies successfully with use of fewer proxies. The efficient portfolios derived also reveals that the downside risk approach would have contributed to a historically higher average total return. This paper outlines a framework for portfolio diversification, the result is empirical and further research is needed in order to grasp the potential of the downside risk measures.

Place, publisher, year, edition, pages
2011. , 42 p.
Keyword [en]
Portfolio Optimization, Real Estate, Downside Risk, Mean Variance, MPT, PMPT, Semivariance, Standard Deviation.
National Category
Civil Engineering
URN: urn:nbn:se:kth:diva-89812OAI: diva2:503654
Subject / course
Real Estate Economics
Educational program
Master of Science - Real Estate Management
Available from: 2012-02-27 Created: 2012-02-16 Last updated: 2012-02-27Bibliographically approved

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Building and Real Estate Economics
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