Portfolio Diversification Benefits Using Real Estate Investment Trusts – An Experiment with US Common Stocks, Equity Real Estate Investment Trusts, and Mortgage Real Estate Investment Trusts

Authors

  • Rafiq Bhuyan American University of Kuwait
  • James L. Kuhle California State University Sacramento
  • Talla Mohammed Al-Deehani Kuwait University
  • Munir Mahmood Gulf University of Science and Technology

Abstract

Using recent data (2002-2012) from the US financial markets, we study the magnitude and benefits of Real Estate Investment Trust (REIT) and common stock in portfolio diversification. In particular, we examine the effects of risk-reduction benefits through diversifying among common stocks via Equity Real Estate Investment Trusts (EREITs) and Mortgage Real Estate Investment Trusts (MREITs). In addition, overall performance measures are calculated and compared among REIT, common stock and mixed-asset portfolios. We observe that investors can benefit from diversification using EREITs but not MREITs. In fact, MREITs turn out to be the worst asset class to be in diversifying portfolio. This conclusion is in contrast with Kuhle (1987) who claims improvement of portfolio risk reduction with MREITs. Our finding, however, is consistent with Hartzell, et al. (1986) and Chen et al. (2005). Finally, even though our data period consists one of the historic collapses of real estate market in the US, it still indicates the equity EREITs still offers diversification benefits. It provides evidence that small investors can use EREITs to diversify their risks. It also offers an opportunity to earn return on real estate investments without investing in real estate properties which may be beyond investor's capacity.

Keywords: Portfolio diversification; risk; EREITs; MREITs

JEL Classifications: D53; G11; R30

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Author Biographies

Rafiq Bhuyan, American University of Kuwait

Dr. Rafiqul Bhuyan is professor of finance and chairperson of the Department of Finance at American University of Kuwait (AUK). Prior to joining at AUK, Professor Bhuyan served as Associate and then Full professor of finance at California State University San Bernardino, CA. Professor Bhuyan also served at California State University Sacramento, and Midwestern State University in the USA.  He also served at Thompson Rivers University and Concordia University in Canada. Professor Bhuyan published over 60 academic research articles in various journals. Over the last 25 years, Dr. Bhuyan also served in editorial board in several journals and also served as reviews for many national and international journals.

James L. Kuhle, California State University Sacramento

Dr. Kuhle is a Professor of Finance and has been serving in academia over 30 years. In addition to his numerous publications in international journals, he also served in editorial board of journals and served as a reviewer for many journals.,

Talla Mohammed Al-Deehani, Kuwait University

Dr. Tall is an Associate Professor and Chair of the Department of Finance and Financial Institutions. He has published many articles in international journals and served in corporate baords in financial institutions and ministry of finance, Kuwait.

Munir Mahmood, Gulf University of Science and Technology

Dr. Mahmood is an Assistant Professor of Statistics. He has published many articles in applied staistics with application in finance and economics. He also served in US and Australian universities before moving to Kuwait.

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Published

2015-10-16

How to Cite

Bhuyan, R., Kuhle, J. L., Al-Deehani, T. M., & Mahmood, M. (2015). Portfolio Diversification Benefits Using Real Estate Investment Trusts – An Experiment with US Common Stocks, Equity Real Estate Investment Trusts, and Mortgage Real Estate Investment Trusts. International Journal of Economics and Financial Issues, 5(4), 922–928. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/1388

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