Purpose - The paper examines the benefits of further diversifying a global portfolio of
financial assets with New Zealand farm real estate (FRE).
Design/methodology/approach - We compare efficient sets generated with and without
farm real estate using portfolio theory.
Findings - The results show that given the predominantly negative correlation between
FRE and financial assets, the risk-return tradeoffs of portfolios of financial assets can be
improved significantly. The diversification benefits measured in terms of risk reduction,
return enhancement, and improvement in the Sharpe performance ratios are robust under a
number of FRE risk-return scenarios as well as under high and low inflationary periods.
Using 5- and 10-year rolling periods we also find that FRE is a consistent part of risk
efficient portfolios. Consistent with the results reported in Lee and Stevenson (2006) for
UK real estate the risk reduction benefits of diversifying with FRE are larger than the risk
enhancement benefits.
Practical implication - The results suggest that FRE takes on a consistent role of riskreducer
rather than a return-enhancer in a globally diversified portfolio. FRE appears to
deserve more serious consideration by investment practitioners that it has been accorded in
the past.
Originality/value – The study examines the role of direct real estate in a globally
diversified portfolio of financial assets.[Show full abstract]
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