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Real Estate Finance > Lecture 12: Performance & Portfolio considerations > Flashcards

Lecture 12: Performance & Portfolio considerations Flashcards

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1
Q

Holding Period Returns (HPR):
HPR = ????
D: dividend or any other cash income

A

Real Estate investment performance (p1):
Holding Period Returns (HPR):
HPR = (P_t - P_t-1 + D)/ P_t-1
D: dividend or any other cash income

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2
Q

Geometric Mean Return (compounded rate of return)
GMR = {Căn bậc n[????]} -1
=> superior when measuring the performance of investment for a ?? of time

A

Real Estate investment performance (p2):
Geometric Mean Return (compounded rate of return)
GMR = {Căn bậc n[(1+HPR1)(1+HPR2)…(1+HPRn)]} -1
=> superior when measuring the performance of investment for a specified period of time

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3
Q

Arithmetic Mean Return
AMR = ??
- a simple (non-compounded) average
- Widely used in statistical studies spanning very long periods of time
- AMR almost the same as GMR (for a ? and ?? series!)

A

Real Estate investment performance (p3):
Arithmetic Mean Return
AMR = Sum(HPR)/n
- a simple (non-compounded) average
- Widely used in statistical studies spanning very long periods of time
- AMR almost the same as GMR (for a steady and non-volatile series!)

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4
Q

Real Estate investment performance (p4):
The foundation for modern finance theory is the notion that:
- variability in asset returns represents ?
- ? over what could be earned on a ? investment represent the price of risk

A

Real Estate investment performance (p4):
The foundation for modern finance theory is the notion that:
- variability in asset returns represents risk
- premiums over what could be earned on a riskless investment represent the price of risk

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5
Q

Real Estate investment performance (p5):
Coefficient of Variation (Standard Deviation of Returns/Mean Return)
- The level of ? per unit of ?
- Also known as “?-to-?” ratio

A

Real Estate investment performance (p5):
Coefficient of Variation (Standard Deviation of Returns/Mean Return)
- The level of risk per unit of return
- Also known as “risk-to-reward” ratio

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6
Q

Real Estate investment performance (p6):
It may not be optimal to focus on the risk and return of individual asset or property => Need to consider a ?
- Asset efficiency? Does adding an asset to a portfolio add to returns while maintaining or lowering portfolio risk?

A

Real Estate investment performance (p6):
It may not be optimal to focus on the risk and return of individual asset or property => Need to consider a portfolio
- Asset efficiency? Does adding an asset to a portfolio add to returns while maintaining or lowering portfolio risk?

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7
Q

Portfolio Returns:
HPR_P = ???
where W’s are weights

A

Portfolio Returns:
HPR_P = W1HPR1 + W2HPR2 +…..
where W’s are weights

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8
Q

Portfolio Weighting:

??: Maximum return for a given risk level

A

Portfolio Weighting:

Efficient frontier: Maximum return for a given risk level

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9
Q 
Diversification benefit (p1):
Portfolio Risk:
??
- Not a simple weighted average!! 
- There is interaction between returns of assets
A 
Diversification benefit (p1):
Portfolio Risk:
Standard deviation
- Not a simple weighted average!! 
- There is interaction between returns of assets
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10
Q 
Diversification benefit (p2):
Covariance:
A statistical measure of how ? two data series (e.g., asset returns) ? together over time
A 
Diversification benefit (p2):
Covariance:
A statistical measure of how closely two data series (e.g., asset returns) move together over time
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11
Q

Diversification (p3):
Correlation = ? (x,y)/ (?x*?y)
(SD: standard deviation, sigma)
- Relative measure of movement
- Range of ? to ?
E.g., as the correlation approaches +1, two series are said to move very closely together.
In general, the further away the correlation away from +1, the ? the potential for portfolio risk reduction.
- Maximum risk reduction can be achieved when Correlation of ij = ?

A

Diversification (p3):
Correlation = Covariance (x,y)/ (SDx*SDy)
(SD: standard deviation, sigma)
- Relative measure of movement
- Range of +1 to -1
E.g., as the correlation approaches +1, two series are said to move very closely together.
In general, the further away the correlation away from +1, the greater the potential for portfolio risk reduction.
- Maximum risk reduction can be achieved when Correlation of ij = -1!

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12
Q 
Growing interest (and ease) in global diversification
- Evolution of global ? structures in major cities 
Development of commercial mortgaged-backed securities (CMBS) markets (more on this in the next lecture!)  
=> ? allow investors to take a position (long & short) in real estate without actually ? or ? properties.
A 
Growing interest (and ease) in global diversification
- Evolution of global REIT structures in major cities 
Development of commercial mortgaged-backed securities (CMBS) markets (more on this in the next lecture!)  
=> Derivatives allow investors to take a position (long & short) in real estate without actually buying or selling properties.
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13
Q

Risks of global investment:

  • Currency risk
  • Different tax laws & property rights
  • Communication & culture differences
A

Risks of global investment:

  • Currency risk
  • Different tax laws & property rights
  • Communication & culture differences
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14
Q

Consider an investment held over three years with a return of +20 percent in the first year, -25 percent in the second year, and +20 percent in the third year. What is the arithmetic mean return on the investment?

A

5%

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15
Q

Geometric mean returns are:
A.
Simple averages of holding period returns

B.	 Expressed as compound rates of interest 

C.	 More applicable when no specific time interval is considered to be any more important than another 

D.	 Widely used in statistical studies spanning very long period of time
A

B

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16
Q

Which of the following statements is TRUE?
A.
If two securities have the same positive mean returns and they are perfectly, positively correlated, an investor in such securities will earn a positive return with zero risk.

B.	 The optimal portfolio is obtained by combining a group of securities which, by themselves, offer the highest returns with the lowest risk. 

C.	 In comparison to portfolios comprised entirely of corporate stocks and bonds, investment portfolios which include some form of real estate investment tend to offer lower levels of risk for equivalent returns. 

D.	 All of the above
A

C

17
Q

Assume a portfolio is comprised of two securities, A and B, whose standard deviations are 0.0412 and 0.0721, respectively. If their covariance is 0.002, what is their coefficient of correlation?

A

0.673

18
Q

Including REITs in a portfolio containing S&P 500 securities produces diversification benefits. Why?

A.	 Real estate investment returns are highly correlated with returns for stocks 

B.	 Real estate investment returns are not highly correlated with returns for stocks  

C.	 Real estate investment returns are not subject to federal income taxes 

D.	 Real estate investment returns do not change much from year to year
A

B

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