68 The Strengths and Limitations of Risk Measures in Real Estate: A Review Chyi Lin Lee Centre of Real Estate Studies Faculty of Geoinformation Science and Engineering Universiti Teknologi Malaysia 81310 Skudai, Johor, Malaysia chyilin@fksg.utm.my Abstract The purpose of this paper is to provide a brief overview of the concept of risk measures that used in real estate with a particular emphasis on the merits and drawbacks of these risk measures. The finding reveals that each risk measure has its distinctions and limitations. The finding has a far-reaching implication to investors, particularly, institutional investors, which they should conscious with the advantages and disadvantages of these risk measures in order to determine the most apt risk measure in formulating desirable risk investment strategy. Keywords: Risk Measures, Variance and Investment Risk 1. Introduction Nowadays, variance is the most popular risk measure, which has been employed widely in many real estate and finance studies; and it is also the most popular risk measure for investors (Evans, 2004). Interestingly, variance is not the only risk measure, while there are several fruitful alternatives that can be used as risk measure in current real estate literature. These alternative risk measures are Lower Partial Moment (downside risk) (LPM), Mean Absolute Deviation (MAD), Minimax and Maximum Drawdwon (MaxDD). However, these risk measures have not received overwhelming response as variance in finance and real estate literature. Does variance is the best risk measure? If not, which risk measure is the ‘best’ risk measure? Unfortunately, the determination of the best risk measure that offer the best return and risk trade-off might be a vain exercise unless a common risk measure is identified (Cheng and Wolverton, 2001; Byrne and Lee, 2004). The difficulty for determining it is also demonstrated by the Cheng and Wolverton (2001) and Cheng (2001) in which they reveal that downside risk and variance are not directly comparable. As such, it is implausible to conclude which risk measure is superior that others. Additionally, Biglova et al., (2004) and Byrne and Lee (2004) also reveal empirical evidences that different risk measures provide different portfolio allocation and different performance result for an asset. These findings have a practical implication to investors that the choice of the risk measure depends on the investors’ risk attitudes and investment objectives. Therefore, understanding the concept, distinctions and drawbacks of each different risk measure is inevitable for investors. In this way, they can select the most appropriate risk measure according to their investment objectives and attitudes toward risk. The purpose of this paper is to provide a brief overview on the concept of risk measures that employed in real estate and determine the advantages and disadvantages of these measures. In Section 2, the concept of available risk measures, the strengths and weaknesses of these risk measures are discussed. The choice of risk measures is discussed in Section 3 in which it provides a review for