Date of Award

Spring 4-26-2012

Degree Type


Degree Name

Doctor of Philosophy (PhD)


Real Estate

First Advisor

Dr. Alan Ziobrowski

Second Advisor

Dr. Julian Diaz III

Third Advisor

Dr. Paul Gallimore

Fourth Advisor

Dr. Masaki Mori


The Modern Portfolio Theory (MPT) argues that all unsystematic risk can be diversified away thus there should be no relationship between idiosyncratic risk and return. Ooi, Wang and Webb (2009) employ the Fama-French (1993) three-factor model (FF3) to estimate the level of nonsystematic return volatility in REITs as a proxy for idiosyncratic risk. They find a significant positive relationship between expected returns and conditionally estimated idiosyncratic risk contrary to the MPT. In this research, I examine other potential sources of systematic risk in REITs which may explain the seeming violation of the MPT found by Ooi et al (2009).

I re-examine the proportion of idiosyncratic risk in REITs with Carhart’s (1997) momentum factor, which is largely applied on the FF3 to control for the persistency of stock returns as supplemental risk in the finance literature. Next, I conduct cross-sectional regression and test the significance of the relationship between idiosyncratic risk and expected returns. I further analyze the role of property sector on idiosyncratic risk as well as on its relationship with expected returns.

I argue three conclusions. First, momentum has a relatively minor effect on the idiosyncratic risk consistent with the financial literature. Second, the effect of momentum is not strong enough to cause a significant change in the relationship between idiosyncratic risk and expected returns. Third, a REIT portfolio diversified across property sectors neutralizes the relationship between idiosyncratic risk and expected returns, though the contribution of each property sector is not statistically significant.