Abstract
There is remarkably little empirical evidence of the advantages of increased size on risk levels in real estate portfolios based on actual portfolios. This paper improves this by examining the portfolio risk of a large sample of actual real estate data in the UK over the period from 1981 to 1996. The results show that real estate portfolios of larger sizes tend, on average, to have lower risks than smaller sized portfolios and, more importantly, that portfolios with only a few assets can have very high or very low risk. For fund managers to be confident that their portfolio will have a risk level like the average, they need to hold portfolios of a considerably greater size than they might expect, or can sensibly acquire. Previous studies suggesting that only 20โ40 properties are needed to reduce the risk of a property portfolio down to the market level are a significant underestimate. The actual figure is likely to be 400โ500 properties, well above that of even the largest fund in the UK. Size alone does not necessarily lead to a reduction in portfolio risk. Other factors are of greater importance. Copyright ยฉ 2001 John Wiley & Sons, Ltd.