Exploring Diversification and Risk of Canadian Real Estate Investment Trusts

Real Estate investment Trusts have been adopted as an investment vehicle to allow an investor to reap the benefits of real estate ownership without the traditional illiquidity inherent in real estate. REITs traditionally have been less volatile than the overall North American stock market and is used as a diversification tool within investor portfolios. Exploring the characteristics of geographic and asset diversification of REIT portfolios, this paper examines if a linear relationship exists between diversification and risk of a REIT utilizing a Pearson Correlation analysis. Risk is measured using the Hurdle Rate representing the required return by investors. The findings indicate that little statistical significance exists between geographic diversification and the Hurdle Rate, and additionally the article identifies errors in the market class of REITs on the TSX.