Role of farm real estate in a globally diversified asset portfolio
Abstract
Purpose
This paper seeks to examine the benefits of further diversifying a global portfolio of financial assets with New Zealand farm real estate (FRE).
Design/methodology/approach
The paper compares efficient sets generated with and without FRE using portfolio theory.
Findings
The results show that given the predominantly negative correlation between FRE and financial assets, the risk‐return tradeoffs of portfolios of financial assets can be improved significantly. The diversification benefits measured in terms of risk reduction, return enhancement, and improvement in the Sharpe performance ratios are robust under a number of FRE risk‐return scenarios as well as under high and low inflationary periods. Using five and ten‐year rolling periods it also finds that FRE is a consistent part of risk efficient portfolios. Consistent with the results reported in Lee and Stevenson, for the UK real estate the risk reduction benefits of diversifying with FRE are larger than the risk enhancement benefits.
Practical implications
The results suggest that FRE takes on a consistent role of risk‐reducer rather than a return‐enhancer in a globally diversified portfolio. FRE appears to deserve more serious consideration by investment practitioners that it has been accorded in the past.
Originality/value
The study examines the role of direct real estate in a globally diversified portfolio of financial assets.
Keywords
Citation
Nartea, G. and Eves, C. (2010), "Role of farm real estate in a globally diversified asset portfolio", Journal of Property Investment & Finance, Vol. 28 No. 3, pp. 198-220. https://doi.org/10.1108/14635781011048858
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited