THE PREDICTABILITY OF INTERNATIONAL REAL-ESTATE MARKETS, EXCHANGE-RATE RISKS AND DIVERSIFICATION CONSEQUENCES

International real estate related securities are investigated to see w hether they offer any incremental diversification benefits over foreig n stocks using mean-variance analysis together with a multifactor late nt variable model. Diversification benefits are found to be primarily driven by unanticipated returns which are partially driven by changes in exchange rate risk. Although exchange rate risk accounts for a larg er portion of the return fluctuation in real estate related securities relative to common stocks, international real estate securities provi de some incremental diversification benefits over common stocks even i f currency risks are hedged.