Realistic Portfolio Allocation Decision-Making
for the Small U.S. Retail Investor
MICHAEL J. SEILER
Department of Finance, Hawaii Paciﬁc University, 1132 Bishop Street, Suite 504, Honolulu, HI 96813, USA
VICKY L. SEILER
Hawaii Paciﬁc University, Honolulu, HI 96813, USA
This study introduces new domestic mixed-asset and international equity securities that allow for exact portfolio
replication even by small U.S. retail investors. Using these new series, various return characteristics are
examined. Finally, three sets of mean-variance analyses are conducted: a domestic equity sector-only portfolio,
a domestic mixed-asset portfolio, and an international mixed-asset portfolio. Real estate warrants inclusion to
varying degrees in all three portfolios. International equity inclusion was also demonstrated.
Key Words: international real estate, portfolio analysis, retail investor
Countless studies have examined the diversiﬁcation opportunities offered by real estate
in domestic and international mixed-asset portfolios.
Unfortunately, every study to date
has based the Modern Portfolio Theory (MPT) analysis on conceptualized indexes of
asset class returns. That is, calculated returns from other countries are based on non-
traded, or unsecuritized, indexes that track broad market performance, but not on the
actual return investors would get if they purchased those assets themselves. Since the
only way to achieve returns is to actually buy securities, the use of conceptual indexes in
MPT analysis is somewhat misleading. Moreover, from an applied standpoint, this
analysis is not helpful to individual retail investors for several reasons.
First, investors do not have the opportunity to buy these conceptual indexes.
Therefore, the returns on these indexes are not that meaningful. Second, even if
investors were to go to a foreign country and attempt to replicate an existing index, they
would not be able to do so in many parts of the world because ownership is often
restricted to domestic residents, institutional investors, private groups, or the govern-
Third, buying assets in foreign countries exposes investors to exchange rate risk.
And studies have shown that exchange rate risk alone can remove all the positive returns
The Journal of Real Estate Finance and Economics, 31:3, 319–330, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.