The marginal benefit of diversification in commercial real estate portfolios
Lee, S. L. (2005) The marginal benefit of diversification in commercial real estate portfolios. Working Papers in Real Estate & Planning. 04/05. Working Paper. University of Reading, Reading. pp11.
The number of properties to hold to achieve a well-diversified real estate property portfolio presents a puzzle, as the estimated number is considerably higher than that seen in actual portfolios. However, Statman (1987) argues that investors should only increase the number of holdings as long as the marginal benefits of diversification exceed their costs. Using this idea we find that the marginal benefits of diversification in real estate portfolios are so small that investors are probably rational in holding small portfolios, at least as far as the reduction in standard deviation is concerned.
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