REAL-ESTATE IS NOT NORMAL - A FRESH LOOK AT REAL-ESTATE RETURN DISTRIBUTIONS

Investment risk models with infinite variance provide a better description of distributions of individual property returns in the Russell-NCREIF data base from 1980 to 1992 than normally distributed risk models. Real estate investment risk is heteroscedastic, but the characteristic exponent of the investment risk function is constant across time and property type. Asset diversification is far less effective at reducing the impact of nonsystematic investment risk on real estate portfolios than in the case of assets with normally distributed investment risk. Multirisk factor portfolio allocation models based on measures of investment codependence from finite-variance statistics are ineffectual in the real estate context.