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Risk Management for Residential Property.: Hedging alternatives for small investors
Jönköping University, Jönköping International Business School, JIBS, Commercial Law.
2005 (English)Independent thesis Advanced level (degree of Magister), 10 points / 15 hpStudent thesis
Abstract [en]

This thesis has the intention to investigate the risk situation for small investors in the domestic residential property market in Sweden, and discuss some alternatives for reducing that risk. Focus will be on risk reduction by diversification.

Residential property is considered to be a rather safe investment for the long term investor. The return is determined by the change of value for the property (capital growth), and the direct return through net rental income. When investments in residential property are compared with other types of investments, they have high returns compared to their stan-dard deviation. Diversification gains are described in the frame of the Capital Assets Pricing Model (CAPM).

The CAPM shows that portfolios based on residential property can reduce their risk and maintain the same level of returns through diversification. To get the best effect out of this diversification this should be done with assets that are least correlated with residential property. This thesis has tested with other residential property, other real estate and equities/bonds. Of which equities/bonds gave the best results. An optimal portfolio based on historical data from 1984 – 2003 suggests a portfolio with 40 -60 % residential property, 30 – 60 % bonds and 0 – 10 % equities. This is with a risk free rate between 3 – 11 %. The debt ratio for this portfolio is determined by the investor’s risk-aversity and utility function.

The positive effects from diversification have to be compared to the increased scale effect from investing in more residential property when chosing new investment items. Investors can get a good diversification performance even with a few stakes. The main point in this thesis is that investors with residential property can get positive effects from diversification and the effects from diversification increase the more different the investments are.

Place, publisher, year, edition, pages
2005. , p. 21
Keywords [en]
Residential property, diversification, risk management, capital asset pricing model, property investments, real estate
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-280OAI: oai:DiVA.org:hj-280DiVA, id: diva2:3981
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samhälle/juridik
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Available from: 2005-10-21 Created: 2005-10-21

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CiteExportLink to record
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