Abstract: This study employs a ‘‘hedged’’ apartment REIT index to track the performance
of apartment real estate and to assess the performance of apartments in efficient mixedasset
portfolios consisting of stocks, bonds and real estate. The hedged apartment index
reflects the returns of apartment REITs after the effects of equity REITs and the stock
market are removed from the apartment REIT returns. It is demonstrated that the hedged
apartment REIT index captures a substantial amount of the volatility unique to apartment
real estate. Furthermore, the hedged apartment REIT index does not suffer from the
appraisal-smoothing problem and the apparent seasonality of appraisal-based indices, such
as the Russell-NCREIF apartment index. Therefore, it would appear that the hedged
apartment REIT index can be employed as a proxy for apartment real estate in portfolio
allocation decisions. This study provides evidence that apartment real estate should be a
candidate for some efficient mixed-asset portfolios.