A Performance Comparison between Dwellings and Financial Assets in Israel

Abstract

Focusing on Israeli data from January 1990 to December 2000, this study finds that the annual average return on a diversified investment in stocks is approximately two and four times greater than that on diversified dwelling and bond portfolios, respectively. When considering the embedded risk, however, the dwelling portfolio is found to generally outperform the stock and bond investments. The dwelling portfolio is also found to substantially reduce the risk embedded in the optimal investment portfolio. Moreover, additional diversification with the S&P 500 Index generates further considerable expansion of the efficient frontier. Finally, in contrast to the other asset portfolios, the dwelling portfolio provides a highly positive hedge against actual, expected and unexpected inflation.