by Carolina Fugazza, Massimo Guidolin and Giovanna Nicodano; WP CeRP 69/07
Abstract
We calculate the ex-post portfolio performance for an investor who diversifies among stocks, bonds, REITS and cash. Simulations are performed for two alternative asset allocation frameworks – classical and Bayesian – and for scenarios involving two different samples and six different investment horizons. Interestingly, the ex-post welfare cost of restricting portfolio choices to traditional financial assets only is found to be positive in all scenarios for a Bayesian investor. On the contrary, substitution of E-REITS for stocks in optimal portfolios turns out to reduce ex-post portfolio performance over the nineties for a Classical investor.
JEL Classification Codes: G11, L85.
Keywords: optimal asset allocation, real estate, parameter uncertainty, out-of-sample performance.
November 2007