Choice of a mixed-asset portfolio based on third-degree stochastic dominance
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A1 Alkuperäisartikkeli tieteellisessä aikakauslehdessä
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en
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27
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Journal of Real Estate Portfolio Management
Abstract
This paper optimizes a mixed-asset portfolio (MAP) of stocks, bonds, and direct real estate investments (DREIs) using the third-degree stochastic dominance (TSD) criterion. Hence, by introducing DREIs, we analyze improvements in the efficient frontiers of “super-convex” TSD (SCTSD)-dominant stocks-only portfolios and MAPs of stocks and bonds. Portfolio optimization based on the TSD criterion considers investors’ risk aversion and skewness preferences, which is particularly useful for applications with non-normal return distributions, one of the characteristics of real estate markets. The conditional value-at-risk (CVaR) at several confidence levels is used as an objective function when calculating the efficient frontiers in a quadratic optimization problem. We find that introducing DREIs and bonds separately and together leads to significant improvements in efficient frontiers of SCTSD-dominant MAPs compared to SCTSD-dominant portfolios of stocks only. The relative decrease in CVaR at a 95% confidence level amounted to ∼20% to 30% for the three-asset SCTSD-dominant lowest-risk MAP compared to the stocks-only SCTSD-dominant lowest-risk portfolio depending on a selected subset of DREIs. Optimization tests by including indirect real estate investments (REITs) show that low-risk efficient portfolios are still largely dominated by DREIs but REIT inclusion improves noticeably risk–return characteristics of the high-return end of the MAP efficient frontier.Description
Publisher Copyright: © 2025 The Author(s). Published with license by Taylor & Francis Group, LLC.
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Vedernikov, A 2025, 'Choice of a mixed-asset portfolio based on third-degree stochastic dominance', Journal of Real Estate Portfolio Management. https://doi.org/10.1080/10835547.2025.2571353