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This study explores the role of direct real estate investment in a portfolio context incorporating the real estate imperfections of indivisible assets and no short sales. Mean-variance efficient portfolios are calculated using Treasury-bills, bond and equity indices together with cash flows and appraised values from a set of twenty-two properties having an aggregate appraised value of $336 million. Real estate diversification benefits are shown to be the greatest with smaller properties and are most advantageous at higher target levels of return. The study suggests that a 9% allocation to real estate is optimal, rather than the 20% figure suggested in other studies.


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© Wiley. Final version published as: Kallberg, J. G., Liu, C. H., & Greig, D. W. (1996). The role of real estate in the portfolio allocation process. Real Estate Economics, 24(3), 359-377. Reprinted with permission. All rights reserved.