Stephen Lee and Simon Stevenson
Working Papers in Land Management and Development 08/00
pp. 24
The use of MPT in the
construction real estate portfolios has two serious limitations when used in an
ex-ante framework: (1) the intertemporal instability of the portfolio weights
and (2) the sharp deterioration in performance of the optimal portfolios
outside the sample period used to estimate asset mean returns. Both problems can be traced to wide
fluctuations in sample means Jorion (1985).
Thus the use of a procedure that ignores the estimation risk due to the
uncertain in mean returns is likely to produce sub-optimal results in
subsequent periods. This suggests that
the consideration of the issue of estimation risk is crucial in the use of MPT
in developing a successful real estate portfolio strategy. Therefore, following Eun & Resnick
(1988), this study extends previous ex-ante based studies by evaluating optimal
portfolio allocations in subsequent test periods by using methods that have
been proposed to reduce the effect of measurement error on optimal portfolio
allocations.
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