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60-552: An A-REIT usually owns a portfolio of large properties, which, due to their size and value, cannot be bought by the average private investor . Thus, these large investments are broken up into units of smaller value that can be purchased by private investors, who become unit holders. LPTs first emerged in the Australian sharemarket in the early 1970s. Around this time they were viewed as a substitute for direct property investing, with enhanced liquidity offered as they were listed. Despite

120-678: A double-taxation treaty with the US, accepted by the Internal Revenue Service (IRS). Non-qualified dividends paid by other foreign companies or entities; for example, those receiving income derived from interest on bonds held by a mutual fund, are taxed at the regular and generally higher rate of income tax. When applied to 2013, this is on a sliding scale up to 39.6%, with an additional 3.8% surtax for high-income taxpayers ($ 200,000 for singles, $ 250,000 for married couples). A financier ( / f ɪ n ə n ˈ s ɪər , f ə -, - ˈ n æ n -/ )

180-402: A discount to its NTA, it was considered to be trading at a discount to the realisable value of its underlying assets. As a result, in the past most A-REITs tended to trade at close to their NTA over the long-term average. One of the main benefits of an A-REIT is that it can offer investors a good degree of diversification . Tenant diversity offers a spread of income risk for an A-REIT. As rent

240-411: A diversified portfolio will have less variance than the weighted average variance of its constituent assets, and often less volatility than the least volatile of its constituents. Diversification is one of two general techniques for reducing investment risk. The other is hedging . The simplest example of diversification is provided by the proverb " Don't put all your eggs in one basket ". Dropping

300-440: A diversified portfolio can never exceed that of the top-performing investment, and indeed will always be lower than the highest return (unless all returns are identical). Conversely, the diversified portfolio's return will always be higher than that of the worst-performing investment. So by diversifying, one loses the chance of having invested solely in the single asset that comes out best, but one also avoids having invested solely in

360-414: A dollar per square metre basis. In contrast to residential rents, which are well regulated, in commercial leases there are differing types of rentals or leases. Many buildings are purchased as going concerns and come ready-stocked with tenants , while some A-REITs are also involved in development . Accumulated rents are the gross income of an A-REIT. From this there are a number of expenses that reduce

420-413: A function of n {\displaystyle n} , the number of assets. For example, if all assets' returns are mutually uncorrelated and have identical variances σ x 2 {\displaystyle \sigma _{x}^{2}} , portfolio variance is minimized by holding all assets in the equal proportions 1 / n {\displaystyle 1/n} . Then

480-584: A market capitalization of €19 billion, Westfield Retail with a market capitalization of €7.8 billion, Stockland with a market capitalization of €6.3 billion, GPT Group with a market capitalization of €5.2 billion and the Goodman Group with a market capitalization of €5.1 billion. The first REIT in Australia was the General Property Trust – a listed property trust started in 1971. By the mid 1990s,

540-526: A portfolio of 20 stocks to go down that much, especially if they are selected at random. If the stocks are selected from a variety of industries, company sizes and asset types it is even less likely to experience a 50% drop since it will mitigate any trends in that industry, company class, or asset type. Since the mid-1970s, it has also been argued that geographic diversification would generate superior risk-adjusted returns for large institutional investors by reducing overall portfolio risk while capturing some of

600-575: A portfolio's return below what it would be if the entire portfolio were invested in the asset with the lowest variance of return, even if the assets' returns are uncorrelated. For example, let asset X have stochastic return x {\displaystyle x} and asset Y have stochastic return y {\displaystyle y} , with respective return variances σ x 2 {\displaystyle \sigma _{x}^{2}} and σ y 2 {\displaystyle \sigma _{y}^{2}} . If

660-552: A slow start, the LPT sector has grown rapidly. From less than $ 5 billion in the early 1990s, the sector reached a market capitalisation of $ 43.8 billion in August 2002. As of July 2012 the Australian public real estate sector consists of a total market capitalization of almost €72 billion, accounting for 9.36% of the global real estate investment trust (REIT) market capitalization. The current top five A-REIT managers are Westfield Group with

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720-479: A small number of assets compared to later investment theories, he nonetheless is recognized as a pioneer of financial diversification. Keynes came to recognize the importance, "if possible", he wrote, of holding assets with "opposed risks [...] since they are likely to move in opposite directions when there are general fluctuations" Keynes was a pioneer of "international diversification" due to substantial holdings in non-U.K. stocks, up to 75%, and avoiding home bias at

780-423: A stock are both investors. An investor who owns stock is a shareholder . There are two types of investors: retail investors and institutional investors . A retail investor is also known as an individual investor . There are several sub-types of institutional investor: Investors might also be classified according to their profiles . In this respect, an important distinctive investor psychology trait

840-477: A weighting approach that puts assets in proportion to their relative correlation can maximize the available diversification. "Risk parity" is an alternative idea. This weights assets in inverse proportion to risk, so the portfolio has equal risk in all asset classes. This is justified both on theoretical grounds, and with the pragmatic argument that future risk is much easier to forecast than either future market price or future economic footprint. "Correlation parity"

900-426: Is q = σ y 2 / [ σ x 2 + σ y 2 ] {\displaystyle q=\sigma _{y}^{2}/[\sigma _{x}^{2}+\sigma _{y}^{2}]} , which is strictly between 0 {\displaystyle 0} and 1 {\displaystyle 1} . Using this value of q {\displaystyle q} in

960-404: Is increasing in n rather than decreasing. Thus, for example, when an insurance company adds more and more uncorrelated policies to its portfolio, this expansion does not itself represent diversification—the diversification occurs in the spreading of the insurance company's risks over a large number of part-owners of the company. The expected return on a portfolio is a weighted average of

1020-489: Is risk attitude . Investor protection through government involves regulations and enforcement by government agencies to ensure that market is fair and fraudulent activities are eliminated. An example of a government agency that protects investors is the U.S. Securities and Exchange Commission (SEC), which works to protect reasonable investors in the United States . Similar protections exist in other countries, including

1080-451: Is a person whose primary occupation is either facilitating or directly providing investments to up-and-coming or established companies and businesses , typically involving large sums of money and usually involving private equity and venture capital , mergers and acquisitions , leveraged buyouts , corporate finance , investment banking , or large-scale asset management . A financier makes money through this process when their investment

1140-401: Is also of benefit. The asset classes are those covering office, industrial, retail and also hotel and leisure. It helps to spread the risk in a portfolio as the property value cycles are driven by different underlying economic fundamentals in each sector. The day-to-day management of the properties owned by an A-REIT are generally contracted out to professional property managers. Management of

1200-410: Is an extension of risk parity, and is the solution whereby each asset in a portfolio has an equal correlation with the portfolio, and is therefore the "most diversified portfolio". Risk parity is the special case of correlation parity when all pair-wise correlations are equal. One simple measure of financial risk is variance of the return on the portfolio. Diversification can lower the variance of

1260-457: Is based on a result from John Evans and Stephen Archer. Similarly, a 1985 book reported that most value from diversification comes from the first 15 or 20 different stocks in a portfolio. More stocks give lower price volatility. Given the advantages of diversification, many experts recommend maximum diversification, also known as "buying the market portfolio ". Identifying that portfolio is not straightforward. The earliest definition comes from

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1320-795: Is monotonically decreasing in n {\displaystyle n} . The latter analysis can be adapted to show why adding uncorrelated volatile assets to a portfolio, thereby increasing the portfolio's size, is not diversification, which involves subdividing the portfolio among many smaller investments. In the case of adding investments, the portfolio's return is x 1 + x 2 + ⋯ + x n {\displaystyle x_{1}+x_{2}+\dots +x_{n}} instead of ( 1 / n ) x 1 + ( 1 / n ) x 2 + . . . + ( 1 / n ) x n , {\displaystyle (1/n)x_{1}+(1/n)x_{2}+...+(1/n)x_{n},} and

1380-476: Is now known as "naive diversification", "Talmudic diversification" or "1/n diversification", a concept which has earned renewed attention since the year 2000 due to research showing it may offer advantages in some scenarios. Diversification is mentioned in Shakespeare's Merchant of Venice (ca. 1599): Modern understanding of diversification dates back to the influential work of economist Harry Markowitz in

1440-403: Is paid back with interest, from part of the company's equity awarded to them as specified by the business deal, or a financier can generate income through commission , performance, and management fees. A financier can also promote the success of a financed business by allowing the business to take advantage of the financier's reputation. The more experienced and capable the financier is, the more

1500-456: Is the average of the covariances σ i j {\displaystyle \sigma _{ij}} for i ≠ j {\displaystyle i\neq j} and σ ¯ i 2 {\displaystyle {\bar {\sigma }}_{i}^{2}} is the average of the variances. Simplifying, we obtain As the number of assets grows we get

1560-524: Is the primary source of income for an A-REIT, the greater the number and type of tenant, the lower the risk to the income of an A-REIT resulting from tenant default. Geographic diversification offers A-REITs exposure to differing local economies. It means having assets in more than one State and within States, by being diversified between state regions. Geographic diversification is sometimes across national borders as well. Diversification by property asset class

1620-653: Is the variance on asset i {\displaystyle i} and σ i j {\displaystyle \sigma _{ij}} is the covariance between assets i {\displaystyle i} and j {\displaystyle j} . In an equally weighted portfolio, x i = x j = 1 n , ∀ i , j {\displaystyle x_{i}=x_{j}={\frac {1}{n}},\forall i,j} . The portfolio variance then becomes: where σ ¯ i j {\displaystyle {\bar {\sigma }}_{ij}}

1680-771: The Australia Pacific Exchange are also capable of hosting trusts. A-REITs are a form of listed investment company (LIC) and are considered as such by the ASX. Any A-REIT listed on the ASX has to conform to the reporting standards set out by the ASX. As of July 2012 there were 45 Australian publicly listed real estate companies of which 13 were included in the EPRA index , published by the European Public Real Estate Association (EPRA). The income from A-REITs comes primarily from rent . Rents are usually quoted on

1740-625: The United Kingdom where individual investors have certain protections via the Financial Services Compensation Scheme (FSCS). Company dividends are paid from net income , which has the tax already deducted. Therefore, shareholders are given some respite with a preferential tax rate of 15% on " qualified dividends " in the event of the company being domiciled in the United States. Alternatively, in another country having

1800-416: The capital asset pricing model which argues the maximum diversification comes from buying a pro rata share of all available assets . This is the idea underlying index funds . Diversification has no maximum so long as more assets are available. Every equally weighted, uncorrelated asset added to a portfolio can add to that portfolio's measured diversification. When assets are not uniformly uncorrelated,

1860-499: The 1950s, whose work pioneered modern portfolio theory (see Markowitz model ). An earlier precedent for diversification was economist John Maynard Keynes , who managed the endowment of King's College, Cambridge from the 1920s to his 1946 death with a stock-selection strategy similar to what was later called value investing . While diversification in the modern sense was "not easily available in Keynes's day" and Keynes typically held

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1920-409: The asset is usually tendered for on a regular basis. This is considerably desirable for A-REITs as it helps to keep the property managers diligent if they think that they may lose their management rights. Investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital

1980-423: The asset that comes out worst. That is the role of diversification: it narrows the range of possible outcomes. Diversification need not either help or hurt expected returns, unless the alternative non-diversified portfolio has a higher expected return. There is no magic number of stocks that is diversified versus not. Sometimes quoted is 30, although it can be as low as 10, provided they are carefully chosen. This

2040-514: The asymptotic formula: Thus, in an equally weighted portfolio, the portfolio variance tends to the average of covariances between securities as the number of securities becomes arbitrarily large. The capital asset pricing model introduced the concepts of diversifiable and non-diversifiable risk. Synonyms for diversifiable risk are idiosyncratic risk, unsystematic risk, and security-specific risk. Synonyms for non-diversifiable risk are systematic risk , beta risk and market risk . If one buys all

2100-417: The basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less risk of losing all of them. On the other hand, having a lot of baskets may increase costs. In finance, an example of an undiversified portfolio is to hold only one stock. This is risky; it is not unusual for a single stock to go down 50% in one year. It is less common for

2160-425: The belief investors will have time to recover from any downturns. Yet this belief has flaws, as John Norstad explains: This kind of statement makes the implicit assumption that given enough time good returns will cancel out any possible bad returns. While the basic argument that the standard deviations of the annualized returns decrease as the time horizon increases is true, it is also misleading, and it fatally misses

2220-519: The expected returns on each individual asset: where x i {\displaystyle x_{i}} is the proportion of the investor's total invested wealth in asset i {\displaystyle i} . The variance of the portfolio return is given by: Inserting in the expression for E [ R P ] {\displaystyle \mathbb {E} [R_{P}]} : Rearranging: where σ i 2 {\displaystyle \sigma _{i}^{2}}

2280-785: The expression for the variance of portfolio return gives the latter as σ x 2 σ y 2 / [ σ x 2 + σ y 2 ] {\displaystyle \sigma _{x}^{2}\sigma _{y}^{2}/[\sigma _{x}^{2}+\sigma _{y}^{2}]} , which is less than what it would be at either of the undiversified values q = 1 {\displaystyle q=1} and q = 0 {\displaystyle q=0} (which respectively give portfolio return variance of σ x 2 {\displaystyle \sigma _{x}^{2}} and σ y 2 {\displaystyle \sigma _{y}^{2}} ). Note that

2340-432: The favorable effect of diversification on portfolio variance would be enhanced if x {\displaystyle x} and y {\displaystyle y} were negatively correlated but diminished (though not eliminated) if they were positively correlated. In general, the presence of more assets in a portfolio leads to greater diversification benefits, as can be seen by considering portfolio variance as

2400-453: The financier as "a man who can make two dollars grow for himself where one grew for someone else before". Diversification (finance) In finance , diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets . If asset prices do not change in perfect synchrony,

2460-481: The financier will be able to contribute to the success of the financed entity, and the greater reward the financier will reap. The term, financier, is French , and derives from finance or payment . Financier is someone who handles money. Certain financier avenues require degrees and licenses including venture capitalists , hedge fund managers, trust fund managers, accountants , stockbrokers , financial advisors , or even public treasurers . Personal investing on

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2520-411: The financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance for insightful evaluation. And, importantly, the financier and the entrepreneur do not need the state's or social partners' approval. Nor are they accountable later on to such social bodies if the project goes badly, not even to the financier's investors. So projects that would be too opaque and uncertain for

2580-485: The fraction q {\displaystyle q} of a one-unit (e.g. one-million-dollar) portfolio is placed in asset X and the fraction 1 − q {\displaystyle 1-q} is placed in Y, the stochastic portfolio return is q x + ( 1 − q ) y {\displaystyle qx+(1-q)y} . If x {\displaystyle x} and y {\displaystyle y} are uncorrelated,

2640-444: The gains from diversification. Their approach was to consider a population of 3,290 securities available for possible inclusion in a portfolio, and to consider the average risk over all possible randomly chosen n -asset portfolios with equal amounts held in each included asset, for various values of n . Their results are summarized in the following table. The result for n =30 is close to n =1,000, and even four stocks provide most of

2700-585: The gross income to a net income such as management and maintenance expenses, interest , land tax , etc. Other sources of income include naming or signage rights, roof space for telecommunication companies, and car parking rental. Property trusts must distribute at least 90 percent of their income back to the unit holders. The balance of any monies that are not distributed are held as retained earnings , which are then used to smooth earnings and distributions in future years. A-REITs can hold either domestic or international property assets. Outside of Australia,

2760-506: The higher rates of return offered by the emerging markets of Asia and Latin America. If the prior expectations of the returns on all assets in the portfolio are identical, the expected return on a diversified portfolio will be identical to that on an undiversified portfolio. Some assets will do better than others; but since one does not know in advance which assets will perform better, this fact cannot be exploited in advance. The return on

2820-403: The individual business lines have little to do with one another, yet the company is attaining diversification from exogenous risk factors to stabilize and provide opportunity for active management of diverse resources. The argument is often made that time reduces variance in a portfolio: a "time diversification". A common belief is younger investors should avoid bonds and emphasize stocks, due to

2880-436: The investor usually purchases some species of property. Types of investments include equity , debt , securities , real estate , infrastructure , currency , commodity , token , derivatives such as put and call options , futures , forwards , etc. This definition makes no distinction between the investors in the primary and secondary markets . That is, someone who provides a business with capital and someone who buys

2940-651: The literature on the fallacy of time diversification have been from Paul Samuelson , Zvi Bodie , and Mark Kritzman. Diversification is mentioned in the Bible , in the book of Ecclesiastes which was written in approximately 935 B.C.: Diversification is also mentioned in the Talmud . The formula given there is to split one's assets into thirds: one third in business (buying and selling things), one third kept liquid (e.g. gold coins), and one third in land ( real estate ). This strategy of splitting wealth equally among available options

3000-514: The main countries in which A-REITs hold assets are the United States, New Zealand, and the United Kingdom. Net tangible assets (NTA) is the balance sheet value of the underlying properties in an A-REIT. It has long been regarded as an important measure of the true value of an A-REIT. A-REITs that trade above their NTA were for a long time considered to be overvalued. Conversely, if the A-REIT traded at

3060-587: The marker had grown to a capitalisation of A$ 7 billion. In the late 1990s, the market exploded and by 2002 market capitalisation had reached A$ 43 billion. In 2007, there were 69 REITs and by 2012 their market capitalisation had grown to nearly A$ 90 billion. Unit holders trade on an open market and the value of the unit price is determined by demand and supply . A-REITs are normally listed on the Australian Securities Exchange (ASX). The Bendigo Stock Exchange , National Stock Exchange of Australia and

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3120-483: The other hand, has no requirements and is open to all using the stock market or by word-of-mouth requests for money. A financier "will be a specialized financial intermediary in the sense that it has experience in liquidating the type of firm it is lending to". Economist Edmund Phelps has argued that the financier plays a role in directing capital to investments that governments and social organizations are constrained from playing: [T]he pluralism of experience that

3180-483: The point, because for an investor concerned with the value of his portfolio at the end of a period of time, it is the total return that matters, not the annualized return. Because of the effects of compounding, the standard deviation of the total return actually increases with time horizon. Thus, if we use the traditional measure of uncertainty as the standard deviation of return over the time period in question, uncertainty increases with time. Three notable contributions to

3240-584: The portfolio return's variance equals var [ ( 1 / n ) x 1 + ( 1 / n ) x 2 + . . . + ( 1 / n ) x n ] {\displaystyle {\text{var}}[(1/n)x_{1}+(1/n)x_{2}+...+(1/n)x_{n}]} = n ( 1 / n 2 ) σ x 2 {\displaystyle n(1/n^{2})\sigma _{x}^{2}} = σ x 2 / n {\displaystyle \sigma _{x}^{2}/n} , which

3300-710: The presence of per-asset investment fees, there is also the possibility of overdiversifying to the point that the portfolio's performance will suffer because the fees outweigh the gains from diversification. The capital asset pricing model argues that investors should only be compensated for non-diversifiable risk. Other financial models allow for multiple sources of non-diversifiable risk, but also insist that diversifiable risk should not carry any extra expected return. Still other models do not accept this contention. In 1977 Edwin Elton and Martin Gruber worked out an empirical example of

3360-439: The reduction in risk compared with one stock. In corporate portfolio models, diversification is thought of as being vertical or horizontal. Horizontal diversification is thought of as expanding a product line or acquiring related companies. Vertical diversification is synonymous with integrating the supply chain or amalgamating distributions channels. Non-incremental diversification is a strategy followed by conglomerates, where

3420-430: The state or social partners to endorse can be undertaken. The concept of the financier has been distinguished from that of a mere capitalist based on the asserted higher level of judgment required of the financier. However, financiers have also been mocked for their perceived tendency to generate wealth at the expense of others, and without engaging in tangible labor. For example, humorist George Helgesen Fitch described

3480-544: The stocks in the S&;P 500 one is obviously exposed only to movements in that index . If one buys a single stock in the S&;P 500, one is exposed both to index movements and movements in the stock based on its underlying company. The first risk is called "non-diversifiable", because it exists however many S&P 500 stocks are bought. The second risk is called "diversifiable", because it can be reduced by diversifying among stocks. In

3540-435: The variance of portfolio return is var ( q x + ( 1 − q ) y ) = q 2 σ x 2 + ( 1 − q ) 2 σ y 2 {\displaystyle {\text{var}}(qx+(1-q)y)=q^{2}\sigma _{x}^{2}+(1-q)^{2}\sigma _{y}^{2}} . The variance-minimizing value of q {\displaystyle q}

3600-518: The variance of the portfolio return if the assets are uncorrelated is var [ x 1 + x 2 + ⋯ + x n ] = σ x 2 + σ x 2 + ⋯ + σ x 2 = n σ x 2 , {\displaystyle {\text{var}}[x_{1}+x_{2}+\dots +x_{n}]=\sigma _{x}^{2}+\sigma _{x}^{2}+\dots +\sigma _{x}^{2}=n\sigma _{x}^{2},} which

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