Investing for the Long-Run in European Real Estate

We calculate optimal portfolio choices for a long-horizon, risk-averse investor who diversifies amongEuropean stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations areperformed for scenarios involving different risk aversion levels, horizons, and statistical models capturingpredictability in risk premia. Importantly, under one of the scenarios, the investor takes into account theparameter uncertainty implied by the use of estimated coefficients to characterize predictability. We findthat real estate ought to play a significant role in optimal portfolio choices, with weights between 12 and44 percent...