Real Estate Portfolio Construction and Estimation Risk A Paper presented at the 7th European Real Estate Society Conference, Bordeaux, France, 14-17 June 2000 Stephen Lee † & Simon Stevenson ‡ Abstract The use of MPT in the construction real estate portfolios has two serious limitations when used in an ex-ante framework: (1) the intertemporal instability of the portfolio weights and (2) the sharp deterioration in performance of the optimal portfolios outside the sample period used to estimate asset mean returns. Both problems can be traced to wide fluctuations in sample means Jorion (1985). Thus the use of a procedure that ignores the estimation risk due to the uncertain in mean returns is likely to produce sub-optimal results in subsequent periods. This suggests that the consideration of the issue of estimation risk is crucial in the use of MPT in developing a successful real estate portfolio strategy. Therefore, following Eun & Resnick (1988), this study extends previous ex-ante based studies by evaluating optimal portfolio allocations in subsequent test periods by using methods that have been proposed to reduce the effect of measurement error on optimal portfolio allocations. † Department of Land Management and Development, Faculty of Urban and Regional Studies, The University of Reading, Reading RG6 6AW, England. Phone: +44 118 931 6338, Fax: +44 118 931 8172, E-mail: S.L.Lee@reading.ac.uk ‡ Department of Banking & Finance, Graduate School of Business, University College Dublin, Blackrock, Co Dublin, Ireland. Phone: +353 1 706 8825, Fax: +353 1 283 5482, E-mail: simon.stevenson@ucd.ie Key Words: Ex-post optimisation, ex-ante portfolio performance, Bayes-Stein estimation.