Deck 21: Real Estate in a Portfolio Context

Question 1

A statistical measure of risk is termed:

A) correlation coefficient
B) probability
C) variance d none of the above

Answer 1

variance d none of the above

Question 2

The cost of obtaining all of the information sufficient to make an informed and rational investment in real estate is termed:

A) marketability risk
B) residual risk
C) formation risk
D) liquidity risk

Answer 2

formation risk

Question 3

The amount of risk reduction that occurs through the process of diversification is determined by:

A) the extent to which the returns on the assets are correlated
B) the standard deviations of the assets
C) the returns on the assets
D) the expertise of the portfolio manager

Answer 3

the extent to which the returns on the assets are correlated

Question 4

21-12.The superior returns of real estate outlined by Ibbotson and Siegel was due to:

A) arbitrage pricing model
B) capital asset pricing model
C) restricted portfolio
D) new equilibrium theory

Question 5

21-13.The following is NOT true:

A) diversification reduces the risk associated with holding an asset in isolation
B) diversification reduces risk even when the returns on the combined assets are not correlated
C) transaction costs often outweigh the benefits of diversification
D) none of the above

Question 6

21-10.It appears that the greatest risk reduction occurs through real estate diversification on the basis of:

A) property type
B) geographic location
C) value
D) none of the above

Question 7

21-17.The New Equilibrium Theory suggests that:

A) all assets in a portfolio have equal returns when diversified
B) the excess returns on real estate are a reward for the unique risk characteristics of real estate
C) the low returns on real estate are due to their inflation hedge characteristics
D) none of the above

Question 8

A 1992 study found that at that time real estate as a percent of all pension fund assets represented about:

A) one per cent
B) four per cent
C) nine per cent
D) twenty percent

Question 9

At a point where the return on asset A and the return on asset B are both above their average,the numerator in the coefficient of determination will be:

A) negative
B) positive
C) can be either negative or positive
D) indeterminate

Question 10

21-14.The capital asset pricing model (CAPM)indicates:

A) the manner in which the actual return on an asset may differ from expected return
B) assets whose returns fluctuate more than the market represent added risk to a portfolio
C) the best way to diversify real estate portfolios
D) none of the above

Question 11

Diversification has value that results from risk reduction that occurs when:

A) the returns on the combined assets are perfectly correlated
B) the returns on the combined assets are inversely related to the business cycle
C) the returns on combined assets are uncorrelated
D) none of the above

Question 12

The capital asset pricing model (CAPM)suggests that assets with a Beta of one will have an expected return:

A) equal to that of the market
B) less than that of the market
C) more than that of the market
D) unrelated to that of the market

Question 13

21-16.The major risks associated with investment in real estate include:

A) marketability risk
B) information risk
C) residual risk
D) none of the above
E) all of above

Question 14

Diversification involving real estate can take place by:

A) property type
B) geography
C) analyzing the diversification of regional economies
D) all of the above

Question 15

Real Estate Investment Trusts (REITs):

A) invest in real estate related assets
B) issue stock for purchase by investors
C) may invest in mortgages
D) all of the above

Question 16

21-15.The "smoothing" of real estate asset returns estimated from appraised values refers to:

A) appraised property values do not fluctuate as much as transaction values
B) appraised values is based only on previously appraised values
C) appraised values are never made with reference to transaction values on comparables
D) none of the above

Question 17

21-11.Residual risk refers to:

A) liquidity risk of real estate
B) difficulty of other than large investors to diversify real estate holdings
C) cost of obtaining information to make an informed and rational investment decision
D) the risk of diversifying a portfolio