CAIA - 16 - Investment Styles, Portfolio Allocation And Real Estate Derivatives

Question 1

___ ___ is the risk in a change in property ownership.

Answer 1

Rollover risk is the risk in a change in property ownership.

Question 2

Characteristics of Core Real Estate:

1. Assets are most ___, most ___and least ___
2. Low ___
3. Return comes from ___
4. Properties are ___-___

Answer 2

Characteristics of Core Real Estate:

1. Assets are most liquid, most developed and least levered
2. Low volatility
3. Return comes from income
4. Properties are bond-like

Question 3

___ refers to changes in financing or nature of real estate that increase liquidity.

Answer 3

Rollover refers to changes in financing or nature of real estate that increase liquidity.

Question 4

Characteristics of value-add real estate:

1. Significant amount of return derived from ___ ___ ___
2. Moderate ___
3. Not as ___as core
4. Property type is not ___, not ___ ___or needs ___ ___
5. Specialized ___
6. More ___

Answer 4

Characteristics of value-add real estate:

1. Significant amount of return derived from increased property value
2. Moderate volatility
3. Not as reliable as core
4. Property type is not core, not fully leased or needs new strategy
5. Specialized management
6. More leverage

Question 5

The characteristics of opportunistic real estate:

1. ___ risk
2. ___risk
3. ___ ___
4. Often accessed via ___ ___ real estate funds
5. Value appreciation occurs over ___ years
6. ___ risk
7. Properties are ___ -like
8. Used to access ___ -___ properties

Answer 5

The characteristics of opportunistic real estate:

1. Development risk
2. Leasing risk
3. High leverage
4. Often accessed via private equity real estate funds
5. Value appreciation occurs over 3-5 years
6. Rollover risk
7. Properties are equity-like
8. Used to access cross-border properties

Question 6

There are 3 key reasons to use styles in real estate portfolio analysis:

1. ___ ___
2. Monitoring ___ ___
3. ___ ___

Answer 6

There are 3 key reasons to use styles in real estate portfolio analysis:

1. Performance measurement
2. Monitoring style drift
3. Style diversification

Question 7

To make a real estate style box, the ___ styles may be used along with ___type.

Answer 7

To make a real estate style box, the NCREIF styles may be used along with market type.

Question 8

What is the cap rate (equation)

Answer 8

NOI / Property value

Question 9

___ ___are considered estimates of expected real estate returns.

Answer 9

Cap rates are considered estimates of expected real estate returns.

Question 10

Historically, cap rates have been between ___% and ___% for core real estate.

Answer 10

Historically, cap rates have been between 5% and 10% for core real estate.

Question 11

An expected real estate return approximated by a cap rate is often expressed as a ___ ___ ___, which is the excess of the cap rate over the yield of a default-free 10-year bond.

Answer 11

An expected real estate return approximated by a cap rate is often expressed as a cap rate spread, which is the excess of the cap rate over the yield of a default-free 10-year bond.

Question 12

True voalatility of core real estate risk (equation)

Answer 12

Question 13

Beta of true returns (equation)

Answer 13

Question 14

Expected returns of value-added and opportunistic real estate my be estimated in 3 ways:

1. Using ___ ___rates
2. Using ___ ___rates
3. Using a ___ ___

Answer 14

Expected returns of value-added and opportunistic real estate my be estimated in 3 ways:

1. Using observed cap rates
2. Using absolute hurdle rates
3. Using a risk premium

Question 15

Using ___ ___ for value-add/opportunistic real estate may generate inaccurate results because ___ is less reliable

Answer 15

Using cap rates for value-add/opportunistic real estate may generate inaccurate results because NOI is less reliable

Question 16

Using absolute hurdle rates does not account for changing ___ ___and ___.

Answer 16

Using absolute hurdle rates does not account for changing interest rates and inflation.

Question 17

Using a ___ ___is probably the best approach for estimating expected returns of non-core properties.

Answer 17

Using a risk premium is probably the best approach for estimating expected returns of non-core properties.

Question 18

Derivatives on housing prices offer three potential benefits:

1. ___ ___
2. ___ ___
3. Ability to ___-___residential real estate

Answer 18

Derivatives on housing prices offer three potential benefits:

1. Price revelation
2. Risk Management
3. Ability to short-sell residential real estate

Question 19

The ability of real estate derivatives to provide developers and investors effective risk management depends on :

1. The ability of indices to ___ ___ ___ in ___.
2. The ability of derivatives to offer ____

Answer 19

The ability of real estate derivatives to provide developers and investors effective risk management depends on :

1. The ability of indices to accurately represent changes in value.
2. The ability of derivatives to offer liquidity

Question 20

Baum and Harzell (2012) suggest seven advantages to property derivates:

1. ___ ___ ___than direct real estate
2. ___ ___to real estate returns
3. Smaller ___ ___
4. ___ ___to real estate returns
5. Enabling ___ ___
6. No ___ ___
7. ___ without needing ___

Answer 20

Baum and Harzell (2012) suggest seven advantages to property derivates:

1. Lower transaction costs than direct real estate
2. Instant access to real estate returns
3. Smaller management costs
4. Diversified exposure to real estate returns
5. Enabling short selling
6. No withholding taxes
7. Leverage without needing debt

Question 21

Baum and Hartzell (2012) suggest six disadvantages to property derivatives.

1. ___ and ___market
2. ___risk
3. Lack of acceptable ___
4. Large losses due to ___ ___
5. ___risk (difference between actual performance and index performance)
6. Substantial ___ ___due to mark to market

Answer 21

Baum and Hartzell (2012) suggest six disadvantages to property derivatives.

1. New and illiquid market
2. Counterparty risk
3. Lack of acceptable indices
4. Large losses due to high leverage
5. Basis risk (difference between actual performance and index performance)
6. Substantial accounting volatility due to mark to market

Question 22

A ___ ___ ___ ___is a swap agreement between two parties to exchange payments based on the property market.

Answer 22

A property total return swap is a swap agreement between two parties to exchange payments based on the property market.

Question 23

In a property total return swap, the buyer pays an amount each year based on ___ or ___ ___ ___and the seller pays the ___ ___ on a ___ ___.

Answer 23

In a property total return swap, the buyer pays an amount each year based on fixed or floating interest rates and the seller pays the total return on a property index.

Question 24

A property total return swap’s market value at the time its struck is ___

Answer 24

A property total return swap’s market value at the time its struck is zero

Question 25

Property total return swaps have relatively ____ counterparty risk.

Answer 25

Property total return swaps have relatively **low** counterparty risk.

Question 26

The margins (if added) on property total return swaps is typically \_\_\_%-\_\_\_%.

Answer 26

The margins (if added) on property total return swaps is typically **5**%-**20**%.

Question 27

Where are property total return swaps are traded

Answer 27

Property total return swaps are traded **over the counter**.

Question 28

Market participants consider a swap's fixed rate represents the ___ \_\_\_ ___ on a specific segment of the real estate market.

Answer 28

Market participants consider a swap's fixed rate represents the **implied expected return** on a specific segment of the real estate market.

Question 29

Total property swaps can be used as a ___ or to provide ___ \_\_\_.

Answer 29

Total property swaps can be used as a **hedge** or to provide **instant exposure**.

Question 30

Exchange-traded contracts have little counterparty risk since parties to the contracts ___ \_\_\_ \_\_\_.

Answer 30

Exchange-traded contracts have little counterparty risk since parties to the contracts **deposit mandatory collateral.**

Question 31

\_\_\_ ___ \_\_\_ ___ \_\_\_are bonds that make coupon payments based on the performance of a real estate index.

Answer 31

**Structured real estate index notes** are bonds that make coupon payments based on the performance of a real estate index.

Question 32

Real estate index notes have ___ counterparty risk than total return swaps.

Answer 32

Real estate index notes have **greater** counterparty risk than total return swaps.

Question 33

The ___ index is a serires of indices consisting of 25 commercial mortgage backed securities with different credit ratings.

Answer 33

The **CMBX** index is a serires of indices consisting of 25 commercial mortgage backed securities with different credit ratings.

Question 34

The ___ index is a series of indices consisting of CDSs that reference 20 subprime residential MBSs.

Answer 34

The **ABX** index is a series of indices consisting of CDSs that reference 20 subprime residential MBSs.

Question 35

\_\_\_ ___ \_\_\_ ___ return indices provide a measure of performance of unlevered commercial property investments. The process involves delevering REIT share prices and then using them to track changes.

Answer 35

**Stock** **market based property** return indices provide a measure of performance of unlevered commercial property investments. The process involves delevering REIT share prices and then using them to track changes.