Real Estate in a Portfolio Context

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					  Chapter 21
Real Estate in a Portfolio
         Context
21-1            Chapter 21
            Learning Objectives
   Understand the relevance of real estate
    investments in constructing portfolios of assets
   Understand how the risk and return of a portfolio
    of assets can differ from that of the individual
    assets that make up the portfolio
   Understand how diversification affects the risk of
    a portfolio
   Understand what characteristics of assets are
    important insofar as constructing “ efficient”
    portfolios
      THE NATURE OF
     DIVERSIFICATION
 Real estate in a mixed-asset portfolio
 Real estate diversification means
  different property types in different
  geographic locations
 Risk measured as the volatility of an
  asset’s expected return
 Expected return based on probable
  outcomes
       THE NATURE OF
      DIVERSIFICATION
 Variance is the dispersion of the
  probable outcomes about the mean
 Standard deviation is the square root of
  the variance
 Portfolio risk of two assets may be less
  than risk of either asset held in isolation
 Correlation coefficient determines the
  degree of diversification
        BENEFITS OF
      DIVERSIFICATION
 Value is a costless reduction in risk by
  combining assets
 Efficient frontier gives portfolios with
  greatest return for a given level of risk
 Degree of investor’s risk adversity
  determines investor’s point on frontier
THEORIES OF ASSET PRICING
    Capital Asset Pricing Model
      Diversifiable vs. non-diversifiable risk
      Asset return is the riskfree rate plus the
       risk premium based on market risk
      Beta is the movement of the asset with the
       market
    Arbitrage Pricing Theory - asset return
     is a function of more than one index
    REAL ESTATE IN MIXED-
      ASSET PORTFOLIO
   Problem with appraised values
       Inside appraisals
       Smoothing of risk
   Sources of real estate data
       Russell-NCREIF
       NAREIT and Commingled real estate funds
       National Association of Realtors
       R.G. Ibbotson Associates
       NAREIT
ISSUES IN DIVERSIFICATION
  New equilibrium theory - excess returns
   to real estate based on unique risk
  Residual risk - difficult for small
   investors to diversify based on cost
  Marketability risk - lack of liquidity
  Information risk - cost of obtaining
   information
  Restricted portfolios for some investors
    WITHIN-REAL ESTATE
     DIVERSIFICATION
 Diversification by property type
 Geographic diversification
 International diversification

				
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