Portfolio Bias of Real Estate Companies Vs. Financial Markets
Abstract: This study will apply the Capital Asset Pricing Model (CAPM) to help understand the relationship between traded real estate companies and their respective financial markets. The aim will be to quantitatively explain the link between real estate companies holding different asset types within their portfolio and their traded financial markets using betas from CAPM. Some companies have preferences towards one type of real estate assets; which could be referred to as "portfolio bias." On the other hand some companies have a portfolio bias towards diversification and hold a portfolio of diversified assets. This study will examine how diversification plays a role in both correlation to the market and overall return. The idea is that a real estate company holding a more diversified portfolio performs more like the market and therefore acts more like the market portfolio made up of value weighted stocks and securities within the financial market. A more diversified portfolio should pose less risk and perform better over the long term which many studies have shown to be the case in financial markets. This study will also explore the connection between underlying asset types using residential, retail and diversified assets compared to their traded financial markets to determine the role of portfolio bias.
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