Ivory towers to office towers, Wall Street to Main Street : a study of the relationship between modern portfolio theory and private equity real estate

Abstract

This thesis attempts to relate the principal elements of Modern Portfolio Theory ('MPT') to real estate, recognizing that MPT was built not for real estate, but for stocks and bonds. It is split into two parts; the first part deals with 'the theory' of real estate investing, including a commentary on both why mixed-asset portfolios include real estate components, and how MPT relates to real estate. The second part deals with 'the reality'; the extent (or otherwise) to which different investor types apply MPT to their direct, private equity real estate investment strategies. It attempts to answer this question by a case study approach, focusing on four investor types. These investors were specifically chosen because of the fact that they are, in each case, sophisticated groups who have a knowledge and understanding of the principal elements of MPT. The extent to which they feel that all elements of MPT are relevant to real estate is, ultimately, the question that this paper attempts to answer.