SECTOR DIVERSIFICAITON AND ITS EFFECT ON RISK EXPOSURE OF CANADIAN REAL ESTATE INVESTMENT PORTFOLIO

The objective of this project is to use sector diversification method to mitigate the downside risk of a Canadian real estate investment portfolio under Value-at-Risk measurement. During real estate bubble burst, Canadian real estate investors are unable to sell their assets due to the illiquid market condition. In the first half of this paper, we attempt to set up an appropriate portfolio risk measure by applying GJR-GARCH model and t-copula methods, associated with Extreme Value Theory, which will improve model accuracy. We discover that using 10% of the portfolio value to short Canadian commercial bank stocks can result in considerate VaR reduction. The research result provides a more affordable way for individual investors to hedge their risks in Canadian real estate market.