ABSTRACT
This chapter reviews research into real estate investment trusts (REITs) asset allocation to consider whether REITs are real estate and the role of REITs in a mixed asset portfolio. For the purposes of empirical analysis, the following asset classes are considered: large-cap stocks, small-cap stocks, long-term government bonds and REITs for the period January 1994 to December 2016. However, the correlation of REITs with stocks and bonds is time varying. To investigate the long-run relationship between REITs and private real estate, the correlation between the capital returns of the two asset classes are examined over increasing holding periods from 1 month to 60 months. The lack of correlation between REITs and private real estate returns, in the short-run, can be largely attributed to the differences in capital appreciation. The mean-variance approach finds the combination of assets that for each level of risk offers the highest return or for each level of return offers the lowest risk.
