Quiz 22: Real Estate Investment Performance and Portfolio Considerations

Business

Holding period return (HPR) is the return to the holder for the particular period of the investment of the fund. The following is the formula to calculate the holding period return: img Here, The holding period return is HPR. The time period is t. The price at time t is img . The price at time t-1 is img The dividend at time t is img . a. Quarterly holding period return (HPR) for each investment The following are the data inputs in spreadsheet: img The following are the obtained results in spreadsheet, the holding period return for the given values is provided below: img b. Arithmetic mean Arithmetic mean is the sum of total values divided by the total number of values. Calculate the arithmetic mean for common stock fund as follows: img Therefore, the arithmetic mean of commons stock fund is img . Calculate the arithmetic mean for real estate fund as follows: img Therefore, the arithmetic mean of real estate fund is img . Standard deviation Standard deviation is a measure of dispersion of possible outcomes around the expected value of a random variable. Standard deviation is calculated as follows: img Where, The variance is img . The each value in the set is X. The arithmetic mean is img The number of return is N. Standard deviation of common stock funds' HPR: The following are the data inputs in spreadsheet: img The following are the obtained results in spreadsheet: img Therefore, the standard deviation of common stock funds' HPR is img . Standard deviation of real estate funds' HPR: The following are the data inputs in spreadsheet: img The following are the obtained results in spreadsheet: img Therefore, the standard deviation of real estate funds' HPR is img . Geometric mean Geometric mean is the measure of compound rate of growth over the period of time. It assumes that all cash flows are reinvested in the asset and those reinvested fund earn the following rates on return. Calculate the geometric mean of common stock as follows: img img Therefore, the geometric mean of common stock is img . Calculate the geometric mean of common stock as follows: img img Therefore, the geometric mean of real estate fund is img . Risk per unit: Coefficient of variation Calculate the coefficient of variation of common stock as follows: img Therefore, the coefficient of variation of common stock fund is img . Calculate the coefficient of variation of real estate fund as follows: img Therefore, the coefficient of variation of real estate fund is img . The real estate fund has more coefficient of variation. Hence, real estate fund contains more risk per unit as compared to the common stock fund. c. Correlation The covariance between the securities of a portfolio measures the relationship between the securities, it may be negative, positive or zero. The positive covariance between the securities increase the risk of the portfolio therefore the negative covariance is always preferable by the investors. The following are the data inputs in spreadsheet: img The following are the obtained results in spreadsheet: img Therefore, the correlation between the common stock fund and real estate fund is img . d. 50% of each fund provided any diversification or not The following are the data inputs in spreadsheet: img The following are the obtained results in spreadsheet: img Therefore, it is clear from the above obtained results that the portfolio of containing 50% of common stock fund and 50% of real estate fund provided diversification and reduced the overall standard deviation (risk) of the investment. e. Optional f. If the manager of ET T is considering for the investment in MREAF then this analysis is very helpful in that as this analysis will show the risk per unit in terms of coefficient of covariation and it will show the risk as standard deviation. If the investment is done in the proportion/weightage then it will show the portfolio's expected return and standard deviation which will be very helpful in making decision and deciding the optimal asset allocation through this analysis only.

Real Estate Investment Data: This refers to the data related to prices for all investment property transactions whether it is for hotel or for warehouses to apartment units. This includes all investment property in the economy including its detailed description of the land, improvements, and cash flows produced by investing in these properties. The difficulties in obtaining data for measuring real estate investment performance are mentioned below. Lack of frequency: There is difficulty in obtaining data to evaluate real estate investment performance due to lack of frequency in the selling of properties like in stocks and bonds. Difficult to compare: Even though the properties are sold, the selling price is not publicly available which makes it difficult to compare the investment performance. Geographic location: As there are many geographic areas in which commercial real estate is located due to which it becomes difficult to make the data available. Hence, due to lack of frequency in selling properties, difficulty in comparing, and different geographical locations makes it difficult to obtain data for measuring real estate investment performance.

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