AbstractProperty
portfolio diversification takes many forms, most of which can be associated
with asset size. In other words larger property portfolios are assumed
to have greater diversification potential than small portfolios.
In addition, since greater diversification is generally associated with
lower risk it is assumed that larger property portfolios will also have
reduced return variability compared with smaller portfolios. If large
property portfolios can simply be regarded as scaled-up, better-diversified
versions of small property portfolios, then the greater a portfolio’s asset
size, the lower its risk. This suggests a negative relationship between
asset size and risk. However, if large property portfolios are not
simply scaled-up versions of small portfolios, the relationship between
asset size and risk may be unclear. For instance, if large portfolios
hold riskier assets or pursue more volatile investment strategies, it may
be that a positive relationship between asset size and risk would be observed,
even if large property portfolios are more diversified. This paper
tests the empirical relationship between property portfolio size, diversification
and risk, in Institutional portfolios in the UK, during the period from
1989 to 1999 to determine which of these two characterisations is more
appropriate.
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