In order to diversify their portfolio, real estate investors should have exposure to different real estate...

Transcribed Image Text:

In order to diversify their portfolio, real estate investors should have exposure to different real estate property types, classes and geographic locations. a. Is it more difficult to hold a diversified direct real estate investment portfolio compared to a diversified stock portfolio? Why? b. What is a common alternative to holding a direct real estate investment portfolio that provides investors diversification with ease? c. What type of risk is eliminated with diversification? What type of risk remains? Is the benefit of diversification when applied to real estate smaller or larger than the benefit of diversification when applied to a stock portfolio? Briefly explain. d. 6. (8 points) Consider the following information about 5 different asset classes (A. B. C, D and E). A Expected Return 12% Standard deviation 21% Correlation matrix: ABCDE A 1.00 0.20 0.70 0.05 0.90 B 8% 14% B 1.00 -0.30 0.45 0.50 C 10% 19% C 1.00 0.20 0.78 D 9% 14% D 1.00 -0.05 E 13% 23% E 1.00 Assume that you currently hold asset A in your portfolio. a. If you must choose only one additional asset to include in your portfolio, which one would you choose in order to maximize your overall portfolio expected return? b. If you must choose only one additional asset to include in your portfolio, which one would you choose in order to minimize your overall portfolio risk? c. If you were to add asset C to become 50% of the value of your portfolio, what can you say about the standard deviation of your overall portfolio? Hint - It must be lower or higher than a specific value. d. If you were to add asset C to become 40% of the value of your portfolio, what would be the expected return on your overall portfolio? In order to diversify their portfolio, real estate investors should have exposure to different real estate property types, classes and geographic locations. a. Is it more difficult to hold a diversified direct real estate investment portfolio compared to a diversified stock portfolio? Why? b. What is a common alternative to holding a direct real estate investment portfolio that provides investors diversification with ease? c. What type of risk is eliminated with diversification? What type of risk remains? Is the benefit of diversification when applied to real estate smaller or larger than the benefit of diversification when applied to a stock portfolio? Briefly explain. d. 6. (8 points) Consider the following information about 5 different asset classes (A. B. C, D and E). A Expected Return 12% Standard deviation 21% Correlation matrix: ABCDE A 1.00 0.20 0.70 0.05 0.90 B 8% 14% B 1.00 -0.30 0.45 0.50 C 10% 19% C 1.00 0.20 0.78 D 9% 14% D 1.00 -0.05 E 13% 23% E 1.00 Assume that you currently hold asset A in your portfolio. a. If you must choose only one additional asset to include in your portfolio, which one would you choose in order to maximize your overall portfolio expected return? b. If you must choose only one additional asset to include in your portfolio, which one would you choose in order to minimize your overall portfolio risk? c. If you were to add asset C to become 50% of the value of your portfolio, what can you say about the standard deviation of your overall portfolio? Hint - It must be lower or higher than a specific value. d. If you were to add asset C to become 40% of the value of your portfolio, what would be the expected return on your overall portfolio?

Answer rating: 100% (QA)

The image you provided appears to contain a question about portfolio diversification in the context of real estate investing followed by a question th... View the full answer