Exam 7: Real Estate as an Investment: Some Background Information

If the expected return to a risky portfolio is 12% with standard deviation 10%, and if the return to the riskless asset is 7%, then the expected return and Volatility for a portfolio consisting of 1/2) riskless bonds and 1/2) the risky portfolio would be:

In a world where riskless borrowing or lending is possible at 6%, if the expected return to the optimal risky asset portfolio is 12%, and you want a target return of 15%, what must you do?

What is meant by the term "umbrella partnership REIT" or "UPREIT")?

According to Portfolio Theory if you do not want to bear much risk:

Suppose you regress a time-series of appraisal-based index periodic returns onto both contemporaneous and lagged securities market returns that do not suffer from lagging or measurement errors. That is, you perform the following regression, where rM,t is the accurate market return in period t and r*t is the appraisal-based real estate return in period t: $r_{t}^{*}=\alpha+\beta_{0} r_{M t}+\beta_{1} r_{M t-1}+\beta_{2} r_{M,t t-2}+\beta_{3} r_{M,t t-3}+\varepsilon_{t}$ The resulting contemporaneous and lagged beta values are: =0.12 =0.20 =0.15 =0.02 What is your best estimate of the true long-run beta between real estate and the securities market index?

Consider two portfolios. Portfolio A has an expected return of 12% and volatility of 11%. Portfolio B has expected return of 9% and volatility of 6%. The interest rate on a riskfree investment is 6% which can be held either long or short). Which of these two risky portfolios is definitely not on the efficient frontier? Show your work for full credit.)

Suppose the riskfree rate is 3% and the market risk premium is 6% and a certain asset has a beta of 0.5. The asset in question is expected to produce a perpetuity of net cash flow to its investors equal to $1,000,000 per year. Suppose the CAPM is "true", and disequilibrium in asset market prices does not endure beyond i.e., "gets corrected" within) one year. Should you buy this asset if you can get it for a current price of $15,000,000? What would be the NPV of such an acquisition, and what would be the minimum expected return on a one-year investment in this asset at that price, and how much of that return if any) would be considered "super-normal" i.e., more than what is warranted by the amount of risk in the investment)?

If an asset has expected return 12%, standard deviation 10%, and T-Bills return is 8%, then its "Sharpe Ratio" is:

Which of the following is true about analytical tools useful in "strategic" long horizon, big picture) and "tactical" shorter horizon, more specific) investment policy analysis for portfolio management?

If A and B are two risky assets that are less than perfectly correlated, and P is a portfolio with 1/2 its value in A and 1/2 its value in B, then:

What is the main value or usefulness of real estate in the portfolio on the asset side of the balance sheet, and what is its main value or usefulness in dealing with the liability side of the balance sheet, for a typical pension fund?

If the riskfree interest rate is 5%, the market price of risk is 6%, and the beta is 0.5, then, according to the classical single-factor CAPM, what is the equilibrium expected total return for investment in the asset in question?

Alex and Kay are two retail property investment managers hired one year ago by two different investors. In both cases the managers were free to use their own judgment regarding geographical allocation between properties in the East versus West of the country. Kay allocated her capital equally between the two regions, while Alex placed 65% of his capital in the Western region. After one year their respective total returns were as depicted in the table below. As you can see, Kay beat Alex by 60 basis-points in her total portfolio performance for the year. Alex \& Kay's returns realized for clients: Weights: Alex Kay East 35\% 50\% West 65\% 50\% Returns: Alex Kay Total\nobreakspacePortfolio 6.65\% 7.25\% East 6.00\% 6.50\% West 7.00\% 8.00\% How would you attribute this 60 basis-point differential between pure allocation performance, pure selection performance, and a combined interaction effect, if you wanted to compute an unconditional performance attribution that was independent of the order of computation? Note: This is equivalent to taking Alex as the benchmark against which Kay's performance is being compared.)

REITs don't have to pay corporate income taxes, but in return they face what major restriction?

If real estate has an expected return of 10% and stocks have an expected return of 15% then what would be the expected return of a portfolio consisting of 80% real estate and 20% stocks?

Describe the implications for asset market efficiency and investment return behavior associated with: a) Zero autocorrelation in periodic returns series; b) Positive autocorrelation in periodic returns series; c) Negative autocorrelation in periodic returns series.

Suppose REIT prices have risen strongly for two consecutive years. It is reasonable to expect:

Suppose REIT share prices have plunged 25% in the past year. Then it is reasonable to expect:

In portfolio theory, what is the definition of an "optimal" portfolio of risky assets if we assume that no such thing as a riskless asset exists? That is, what are the characteristics that define, or the criteria that determine, such a portfolio?) Now answer this same question under the assumption that there does exist a riskless asset and state how you could identify the optimal portfolio. Be complete, defining any specialized terms you employ.

Describe the "non-normal" risk that is not rigorously modeled by modern portfolio theory.