THE ROLE OF REAL-ESTATE IN THE PORTFOLIO ALLOCATION PROCESS

This study explores the role of direct real estate investment in a por tfolio context incorporating the real estate imperfections of indivisi ble assets and no short sales. Mean-variance efficient portfolios are calculated using Treasury-bills, bond and equity indices together with cash flows and appraised values from a set of twenty-two properties h aving an aggregate appraised value of $336 million. Real estate divers ification benefits are shown to be the greatest with smaller propertie s and are most advantageous at higher target levels of return. The stu dy suggests that a 9% allocation to real estate is optimal, rather tha n the 20% figure suggested in other studies.