Theoretical and practical portfolio management has been affected by the Modern Portfolio Theory (MPT) suggested by Markowitz (1952) for almost 60 years. An almost innumerable amount of research on this topic has been conducted and the MPT is still one of the most popular frameworks in finance. However, even Markowitz (1959) himself criticized and mentioned that a framework based on semi-variance, semi-deviation, or other shortfall risk measures instead of variance and standard deviation is more suitable to incorporate investors’ risk perception and to take care of the asymmetry in return distributions. Nevertheless, it took some time until financial research began to focus on portfolio optimization in a downside risk (DR) framework in more detail. While in the meantime, existing literature has been growing in the context of common stock and bond portfolios, there is still very limited research conducted related to pure real estate portfolios. In contrast to previous studies in the field of DR optimization in real estate portfolios, the theoretical / technical merit of the Estrada (2008) approach is given by the innovative concept of measuring co-downside movements and using a similar optimization procedure to that in the traditional mean-variance (MV) framework at the same time. To our knowledge, this approach is applied for the first time to portfolios of real estate assets. Furthermore, covering the eight largest securitized real estate markets around the world, the analysis is also the first applying the DR framework in a global context. In addition to the theoretical merits of the DR framework, the empirical results further support the strength of the applied DR framework compared to the MV framework and provide several interesting and practical implications for investors in international securitized real estate markets. The conducted analysis documents in a comprehensive way that the DR approach suggested by Estrada (2008) has its merits when applying it to securitized real estate portfolio optimization problems. Furthermore, it is shown that portfolio weights differ substantially from MV optimization and the DR framework is superior in an out-of-sample analysis. Thus, the presented DR framework constitutes a useful contribution to investors facing practical portfolio optimization problems in securitized international real estate markets.


Downside Risk Analysis; International Real Estate Markets; Portfolio Management; Portfolio Optimization; Out-of-Sample Analysis