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The role of portfolio diversification in the hotel industry Evidence from the Italian market

The role of portfolio diversification in the hotel industry Evidence from the Italian market Purpose – The purpose of this paper is to study whether geographic and sector diversification allow for a significant reduction in the risk exposure of a portfolio of hotel investments in one of the major tourist markets, the Italian market. Design/methodology/approach – This paper evaluates the benefits related to a Markowitz diversification approach for the construction of a specialised portfolio in the hotel real estate market. The portfolio analysis considers the degree of efficiency of each portfolio, the type of diversification adopted by a more efficient portfolio, the persistence of results over time and the impact of diversification constraints. Findings – The results demonstrate that, while standard geographic and sector diversification allow for good results, the more efficient portfolios are more concentrated. The trade‐off is worse if some concentration constraints are established, but the portfolios identified are characterised by higher performance persistence. Research limitations/implications – The analysis only considers high‐quality hotels in the Italian market. Unfortunately, some information on costs is not as detailed as would be desired. The availability of a more complete database could increase the significance of the results obtained. Practical implications – The results are relevant for constructing all hotels' portfolios, like those managed by a real estate fund manager, in order to define the type and degree of diversification that allow for minimal risk exposure. Originality/value – This paper is the first to apply the Markowitz theory to the Italian hotel industry in order to identify the best diversification criteria. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png EuroMed Journal of Business Emerald Publishing

The role of portfolio diversification in the hotel industry Evidence from the Italian market

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1450-2194
DOI
10.1108/14502191111130299
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to study whether geographic and sector diversification allow for a significant reduction in the risk exposure of a portfolio of hotel investments in one of the major tourist markets, the Italian market. Design/methodology/approach – This paper evaluates the benefits related to a Markowitz diversification approach for the construction of a specialised portfolio in the hotel real estate market. The portfolio analysis considers the degree of efficiency of each portfolio, the type of diversification adopted by a more efficient portfolio, the persistence of results over time and the impact of diversification constraints. Findings – The results demonstrate that, while standard geographic and sector diversification allow for good results, the more efficient portfolios are more concentrated. The trade‐off is worse if some concentration constraints are established, but the portfolios identified are characterised by higher performance persistence. Research limitations/implications – The analysis only considers high‐quality hotels in the Italian market. Unfortunately, some information on costs is not as detailed as would be desired. The availability of a more complete database could increase the significance of the results obtained. Practical implications – The results are relevant for constructing all hotels' portfolios, like those managed by a real estate fund manager, in order to define the type and degree of diversification that allow for minimal risk exposure. Originality/value – This paper is the first to apply the Markowitz theory to the Italian hotel industry in order to identify the best diversification criteria.

Journal

EuroMed Journal of BusinessEmerald Publishing

Published: May 17, 2011

Keywords: Italy; Hotels; Real estate; Portfolio investment

References