| Summary: | The aim of this paper is to investigate the impact of Real Estate Investment Trusts (REITs) on portfolio diversification in Malaysia. REITs is known to bring about a stable and optimal return but less evidence on the portfolio allocation of Malaysian REITs in maximizing investors benefit. Four year data is use comprising daily of price quotes of thirteen REITs and twenty three common stock counter for comparison purposes. Through analysis of expected return (ER) and standard deviation (SD) and the establishment of efficient frontier (EF), this paper suggest that Malaysian REITs are able to contribute higher possible return in portfolio diversification as compared to those asset portfolios without REITs participation by optimal allocation of REITs in portfolio between 41.54 to 49.44 percent. This paper also suggest during downturn economic situation higher allocation is advisable to be made in REITs for maximizing investor return as its perfectly negatively correlated to general market. Yet, the uniqueness of Malaysian REITs in term of its properties diversification strategies and size of fund made it difficult for the investors to evaluate its potential.
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