Real Estate Finance Study Set 1

Quiz 22 :Real Estate Investment Performance and Portfolio Considerations

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What statistical concept do many portfolio managers use to represent risk when considering investment performance
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Statistics is one of the most important tools in analysis in portfolio investment. By using statistical tool the portfolio manager can derive the return and Risk of the portfolio. Based on the analysis derive through statistical tool the portfolio manager decide which stock should be include the portfolio and which stock should not. Statistical concepts are widely used concept in portfolio investment.
For determining the risk the portfolio managers uses various statistical tool which is shown below:
1. Standard deviation
Standard deviation tells the fluctuation in stock price in the specified period of time. If Fluctuation in stock is less, standard deviation of the stock is less and risk of fluctuation is also less.
2. Variance
Variance tells about the variation the stock price over the period of time. If variation in stock price is less, standard deviation is also less, so risk is also less.
3. Covariance
Covariance tells about change in stock price which respect to change in market. If stock changes according to market then covariance of stock which market is less
4. Correlation
Correlation tells about relation of stock with another stock or with market. It shows how stock price change in change in other stock and the market condition.

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How can derivative security be used to hedge portfolio risk
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Derivative is defined as an investment Strategy which helps investor in minimizing the risk. Derivatives are a contract between two parties to sell or buy an underlying asset at specified price at specified period of time.
There are so many types of derivatives which are uses in minimizing the risk, but major four type of derivative is mention below:
1. Forwards Contract
2. Futures Contract
3. Options
4. Swap
Hedging is an investment strategy which uses various strategic tools to investing in various assets. Major strategic tool for hedging is taking long/Short position to protect future changes in the prices of underlying assets.
If spot price less than future price then in short position investor gain and in long position investor loss. If spot price increase from future price then in short position investor loss and in long position investor gain.

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Why should an investor consider investing globally
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Portfolio Returns:
An existing portfolio will try increasing the expected portfolio returns by maintaining or lowering the portfolio risk. The way needs to be considered in which the portfolio risk may have been affected when two investments are combined. The mean returns for portfolios are calculated by taking the weighted average of the mean returns for each investment in the portfolio.
Global diversification:
Nowadays, it is being noticed that there is an increasing number of investors especially large institutional investors for investing on global basis.
The reasons an investor should consider investing globally are as follows:
Increasing opportunities: The number of opportunities all over the globe is increasing which is one of the main reason investors are investing globally as many countries are developing mortgage-backed securities and other instruments as well.
Development of indexes: Indexes measuring the historic returns for commercial real estate are also being developed in the other countries which allow investors for having a benchmark for the performance of real estate.
Diversification benefits: Including real estate from other countries in a portfolio provides diversification benefits and promotes investing globally which helps in reducing portfolio risk in case the expected returns in other countries are favorable.
Hence, investing globally must be considered in order to diversify portfolio risk and achieving higher returns.

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Excel. Refer to the "Ch22_Frontier" tab in the Excel Workbook provided on the Web site. Suppose the correlation between NCREIF and the S P 500 is -20 percent. How does this change the standard deviation of the portfolio when 50 percent of the portfolio is allocated to each investment
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Results reported in the chapter showed that by including either REITs or the NCREIF Index in a portfolio containing S P 500 securities, corporate bonds, and T bills, diversification benefits resulted. Why was this true Did those benefits come about for the same reason for each category of real estate investment
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As an investment advisor for MREAF (Momentum Real Estate Advisory Fund), you are about to make a presentation to the portfolio manager of the ET T pension fund. You would like to show what would have happened had ET T made an investment in MREAF during the last 13 quarters. The ET T manager has provided you with historical data on the performance of its portfolio, which is made up entirely of common stock. Historical data for the ET T portfolio and MREAF are as follows: a. Calculate the quarterly HPR for each investment. b. Calculate the arithmetic mean HPR , the standard deviation of the HPR s, and the geometric mean for each fund. Which fund contained more risk per unit of return c. Was there any correlation between returns on the ET T fund and MREAF d. Would a portfolio that contained equal amounts of ET T securities and MREAF have provided any investment diversification Why e. Optional. Assume each investment could have been combined in a portfolio with weights ranging from 0 percent to 100 percent. What pattern of risk and return would result if each investment were added (deleted) in increments of 10 percent (remember that the sum of the two proportions must always sum to 100 percent) What combination of securities would have constituted the "efficient frontier" (if any) f. If the manager of ET T is considering making an investment in MREAF, of what use is this analysis
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What are some of the difficulties of obtaining data to measure real estate investment performance
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What are the distinguishing characteristics between REIT data and the NCREIF Property Index
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What is the difference between covariance and correlation Why are these concepts so important in portfolio analysis
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What is the d ifference between arithmetic and geometric mean returns
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Mean returns for portfolios are calculated by taking the weighted average of the mean returns for each investment in the portfolio. Why won't this approach work to calculate the standard deviation of portfolio returns
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When NCREIF returns and REIT returns are compared, NCREIF returns exhibit a much lower pattern of variation. Why might this be the case
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