Problem 5 [20 points] 1. What is the long-standing real estate risk premium puzzle? What is the real estate mixed assets allocation puzzle? Do these puzzles really exist? Discuss the causes of these puzzles. 2. Below are Sharpe ratios for both the financial and real estate markets. Briefly discuss their difference and explain why the real estate should have its own Sharpe ratio. Sharpe ratio in the financial market u - S Sharpe ratio in the real estate market from Cheng, Lin and Liu (2013- FR): u - If SRE = (t + trox ) ( B] ) 202 + 20 ? BI (1 - BI) + (1 + (B ) o')TOM + 0? (1 - BI)? (t + trom) 3. Cheng, Lin and Liu (2017-JRER) develop the mixed-asset portfolio by extending the Modern Portfolio Theory (MPT) as follows, min WREL(URE + BORE) TOM + (BIT2 + (1 - B)2 + 28(1 - WRE, WL,T B)T )RE] + wiTol + 2pwREWil(1 - B) + BTIVTOREOLJ S.t. WRETURE + WITUL + (1 - WRE - WL)TTf - WREC = r(T) Target Briefly discuss the difference between these two models and explain why the real estate should have its own asset allocation model