Comparing Downside-Risk and Mean-Variance Analysis Using Bootstrap Simulation

Executive Summary. Is Downside risk (DR) a better alternative to the traditional mean-variance analysis (MV) for real estate portfolio diversification? This study demonstrates a bootstrap approach for comparing the two models. The results show that ex ante DR portfolio return distributions tend to be negatively skewed with a smaller left tail, and median returns seem to be higher than that of MV portfolios. Also, the DR model suggests the weight of real estate in a mixed-asset portfolio is similar to the practice of institutional investors. The results imply that portfolios formed with DR approach have certain desirable properties unavailable to MV portfolios.