Idiosyncratic Risk and Real Estate Securities’ Return
Keywords:Idiosyncratic Risk, Real Estate Securities, Single Index Model, Systematic Risk, Diversification
As ascertained by the CAPM theory, investors should not be compensated on the idiosyncratic risk as it can be completely diversified away. However, the practicality of the CAPM is compromised owing to the assumption of complete information and no transaction cost. Adopting the single index model, this paper empirically examines the idiosyncratic risk of the REIT portfolio in 3 developed markets and 2 emerging markets in Asia, i.e. Singapore, Hong Kong, Japan, Thailand, and Malaysia. The findings indicate that the idiosyncratic risk of real estate security should not be disregarded either in the developed markets or emerging markets.
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