Defining risk

This website explores the relationship between risk and return as it applies, and is applied, to commercial real estate. In particular, it seeks an explanation for the current weight of real estate in life insurance and pension fund portfolios. Focus is laid on the asset allocation decision, as it is affected by the objectives of life and pension funds. The utility of mean-variance portfolio theory, behaviour of value indices, and downside risk are considered. I argue that the use of conventional investment theory in the construction of multi-asset portfolios is inappropriate. In an attempt to provide a more accurate description of investor preferences, an asset pricing model is explicated. Evidence is rendered as to its efficacy, with the results providing insight as to the current low weight of real estate within life and pension fund portfolios.

Keywords: commercial real estate, downside risk, mean-variance portfolio theory, non stationary time series, normality, regime-switching models, target rates-of-return, utility analysis.