Modern Portfolio Theory Is An Essential Part Of Higher Return

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Modern Portfolio Theory Modern portfolio theory is an investment theory based on that investors can construct portfolio to maximize return which based on a given level of market risk, emphasizing that risk is an essential part of higher return. Modern portfolio theory is one of the most significant economic theory dealing with finance and investment, which was published by Harry Markowitz in his paper “Portfolio Selection” in 1952 by Journal of Finance (Shipway, 2009). According to Shipway (2009), the problem of direct real estate investment is the lack of liquidity which compared with other investment media. The reason is real estate special features, such as the large size, high transaction costs, infrequency transaction of real estate…show more content…
Due to the characteristics of real estate market, most of institutions adapt modern portfolio theory as a standard tool for understanding how the real estate market behave, whether independently or as part of the overall investment holdings. The modern portfolio theory would help investors to create a portfolio of investments that produces predictable return. Risk in this system is defined as unstable return. The application of modern portfolio theory to real estate would allows real estate managers to understand both what to expect from real estate investments as a whole, and how those real estate holdings fit into the overall portfolios. However, there are some disagreements of applying modern portfolio theory to real estate. In 1993, Young and Grieg reported that it has been proved mathematically that real estate is unsuitable for modern portfolio theory analysis, because real estate is heterogeneous and the real estate market is illiquid and different to the stock market. Young and Grieg have indicated that due to the investment returns depend on different circumstances of investment properties, the modern portfolio theory is an inaccurate guide for real estate asset allocation (ibid). However, they compared two different properties’ performance and the returns of the two properties are definitely different. They reported that diversification by real estate type and
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