Modern Portfolio Theory Applied to Institutional Real Estate Investment

Abstract

What is the optimal capital allocation to institutional-grade Real Estate that investment managers should pursue to achieve the highest risk-adjusted return? As Real Estate keeps evolving, institutionalizing, and becoming an asset class that is paramount to a well-balanced portfolio, the question of what product types and markets will provide the highest return, less volatility, and greatest diversification remains unclear. This research aims to find the optimal capital allocation in Real Estate that will generate the highest Sharpe Ratio.

This research will use endorsed Real Estate research platforms and conduct one-on-one interviews with institutional Real Estate investment managers to understand how to formulate an investment thesis and capital deployment strategy. Using a Mean-Variance analysis, this study will first illustrate what allocation to Real Estate will deliver the highest risk-adjusted return within a diversified portfolio. Afterward, this study will strive to create a simplified portfolio allocation tool for asset managers to use while formulating their investment decisions.