Modern Portfolio Theory

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The principles of modern portfolio theory established by Markowitz (1952) has been used in much of the research on REITs in recent years. As identified by Miles and McCue (1984), diversification is important in a real estate portfolio. The traditional theory for the diversification is “Do not put all your eggs into one basket”. So, it means an investment strategy which can be limiting your financial risk and get return. Real Estates are not homogeneous and they also are not move as a group. Portfolios therefore have proportionally lower systematic risk and higher unsystematic risk than stocks. Besides, systematic risk is determined by assuming return is normally distributed. This makes real estate diversification more effective. However,…show more content…
According to G. Timothy & Daniel D. Singer (2005), “Diversification has that amazing property of lowering risk without lowering gain. We argue that most investors should be diversified into real estate and now we wish to argue for diversification within the real estate sector exactly for the same reason”. Another study shows that housing consumes almost 55 per cent of Australian household assets (Headey et al., 2005).. “ Historically, the interest of investor in real estate basically for diversification and its capability to maintain the purchasing power of capital. The National Council of Real Estate Investment Fiduciaries (NCREIF) proves that market indexes for the real estate industry have continually shown low correlation with the returns of both bond and stock investments. This suggests that real estate investments can help to increase portfolio diversification.” (Robert, 2009). Undoubtedly, these statements directly proves that there are benefits in diversifying the investment into real…show more content…
However, we cannot simply invest in real estate even though we know the advantages because we has some limitation such as cash and time. “If you plan to only own real estate for 3-6 years, skip it. The chances of your earning a fair return from short-term ownership are pretty low.” (Leonardo,2012). As students, we don’t have such big amount of cash and of course we need to wait for a long time before the maturity of the real estate investment but we only have few years in this field of study. On the other hand, this project has helped us to understand more about real estate investment and we hope that we can exercise this knowledge in the
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