The Effect of Portfolio Allocation Strategy on Stock Market Behavior in Publicly Traded Real Estate Companies

Within the real estate asset class, most companies own and operate properties. How the companies construct their property portfolio, in respect of property type and geographical focus, differ. Some companies have chosen to be focused while the holdings of some companies are well diversified. Depending on which strategy is chosen, the underlying assets of the companies will be different and affected by different factors. This paper investigates if, in Sweden, the composition of the publicly traded real estate companies’ property portfolios affects how their stocks behave on the stock market. Four hypotheses about the behavior is stated, each hypothesis is linked to certain key financial figures that is calculated and analyzed over time. The financial figures that are investigated are the correlation between the companies as well as the correlation with the stock market portfolio, the risk and the risk-adjusted return of the companies. All figures are tested over either a 36 month or a 12 month rolling time period. The results show that the diversified companies display a higher correlation with each other as well as the market since the beginning of the 21st century. Companies that are diversified across property types but focused geographically also display higher correlation. Hence, if a company is focused or diversified geographically doesn’t seem to affect the level of correlation between the companies. Another result is that the smaller, often more focused, companies have a low correlation with each other as well as with the market. However, there are exceptions among the diversified as well as the focused companies. The risk is measured with the help of two variables, the beta coefficient and standard deviation. The results of the rolling beta coefficients show that the companies that are diversified over property type have a higher market risk compared to those that are focused. Whether a company is diversified or focused geographically doesn’t seem to matter. The results of the standard deviation measurements do not show this result as all companies moved in similar fashion. Risk-adjusted return is measured with the help of the Sharpe ratio. The results show that the risk-adjusted return is independent of the composition of the companies’ portfolios. However, in the crisis, the risk-adjusted return of all companies are compressed regardless of how well they performed prior to the crisis