The reading on Alternative Investments mentions that a REIT share would provide greater diversification benefits than an MBS. Could anybody shed some light on why that is the case?
Thanks in advance!
Just a guess here, but an MBS probably has the same type of loans packaged into the security, where a REIT share could have a more diverse mix of income. I don’t think thats 100% true all of the time, but generally. Even with big mall REITS, at least they have geographical diversification.
I think this is due to the fact that an MBS is a single asset class, i.e. residential or commercial etc. REITs can be diversified across numerous asset classes.
Good points but, isn’t the diversification benefit supposed to be with respect to the portfolio ? Just because there is a better diversification among the underlying assets of each class can we conclude that the security by itself has a lower correlation to the average well-diversified portfolio?
^yes. I would say so. Your MBS is correlated more strongly to market. Your REIT (because it is diversified amoungst many assets) has less correlation with the market.
Somehow I don’t see how an asset that is by design diversified, translates to better diversification with respect to a 3rd party of assets. If that was the case wouldn’t everyone just make a portfolio of mutual funds instead of looking at individual securities?
I guess I am going to take this one at face value. Thank you pokhim and general for your responses!