The role of portfolio diversification in the hotel industry Evidence from the Italian market

Purpose - The purpose of this paper is to study whether geographic and sector diversification allow for a significant reduction in the risk exposure of a portfolio of hotel investments in one of the major tourist markets, the Italian market. Design/methodology/approach - This paper evaluates the benefits related to a Markowitz diversification approach for the construction of a specialised portfolio in the hotel real estate market. The portfolio analysis considers the degree of efficiency of each portfolio, the type of diversification adopted by a more efficient portfolio, the persistence of results over time and the impact of diversification constraints. Findings - The results demonstrate that, while standard geographic and sector diversification allow for good results, the more efficient portfolios are more concentrated. The trade-off is worse if some concentration constraints are established, but the portfolios identified are characterised by higher performance persistence. Research limitations/implications - The analysis only considers high-quality hotels in the Italian market. Unfortunately, some information on costs is not as detailed as would be desired. The availability of a more complete database could increase the significance of the results obtained. Practical implications - The results are relevant for constructing all hotels' portfolios, like those managed by a real estate fund manager, in order to define the type and degree of diversification that allow for minimal risk exposure. Originality/value - This paper is the first to apply the Markowitz theory to the Italian hotel industry in order to identify the best diversification criteria.