Re-examination of diversification benefits from foreign real estate investment: a Canadian perspective

This paper studies the diversification benefits of foreign real estate for Canadian investors. Monthly data from December 1994 to December 2006 are used. The evidence supports that foreign real estate is an effective diversification tool. Its low correlation with Canadian stock was consistent through the time period. During the 2001 “Tech Bubble” volatility period, it even had negative correlation. Adding foreign real estate to a portfolio can help reduce the risk and increase the return. Further analysis suggests that it is not necessary to replace Canadian real estate investment by foreign real estate investment to gain the diversification benefits from a portfolio without risk free asset, and it is really depends on the investor's risk tolerance levels to make the decision.