Optimal Portfolio Selection: The Role of Illiquidity and Investment Horizon Article

Cheng, P, Lin, Z, Liu, Y. (2017). Optimal Portfolio Selection: The Role of Illiquidity and Investment Horizon . 39(4), 515-536. 10.1080/10835547.2017.12091485

cited authors

  • Cheng, P; Lin, Z; Liu, Y

fiu authors

abstract

  • Modern portfolio theory (MPT) is a single-period model developed for the efficient securities market, in which asset prices are implicitly assumed to follow a random walk. It is widely agreed that real estate does not fit into the efficient market paradigm; however, mixed-asset portfolio analysis continues to rely on MPT. In this paper, we propose an alternative model that extends the MPT to accommodate multi-period utility maximization, as well as the unique characteristics of real estate such as liquidity risk, horizon-dependence of real estate returns, and high transaction costs. The model is easily implemented. Using real world data, it demonstrates the optimal allocation to real estate in the mixed-asset portfolio is quite in line with the reality of institutional portfolios.

publication date

  • January 1, 2017

Digital Object Identifier (DOI)

start page

  • 515

end page

  • 536

volume

  • 39

issue

  • 4