PROP 1020 / CHAPTER 12 Flashcards
__________ are generally small- to medium-size private investors. These owners are typically conservative and risk-averse. Their goal is often to preserve the value of the real estate portfolio for continued family wealth generation.
Portfolio owners are generally small- to medium-size private investors. These owners are typically conservative and risk-averse. Their goal is often to preserve the value of the real estate portfolio for continued family wealth generation.
The term ____________ is used to refer to a broad class of private and public entities with significant financial resources.
These entities include pension funds, real estate investment trusts, mortgage funds, larger syndicates and limited partnerships, and public corporations.
Each of the portfolios owned by these entities will be shaped by specific goals.
The term institutional investor is used to refer to a broad class of private and public entities with significant financial resources.
These entities include pension funds, real estate investment trusts, mortgage funds, larger syndicates and limited partnerships, and public corporations.
Each of the portfolios owned by these entities will be shaped by specific goals.
TRUE OR FALSE? The larger the variance (or standard deviation) of the returns, the higher the level of project risk inherent in an investment.
ANSWER: TRUE
Two statistical measures of the relationship between two investments are the _________ and the ____________.
Two statistical measures of the relationship between two investments are the covariance and the correlation coefficient.
The covariance (Cab) of the returns of two properties (a and b) is equal to the correlation coefficient between the investments (rab) times the __________ of each property.
The covariance (Cab) of the returns of two properties (a and b) is equal to the correlation coefficient between the investments (rab) times the standard deviation (σ) of each property.
A positive value for the covariance or correlation
coefficient indicates that the investments’ returns tend to _ _ _ _ _
A positive value for the covariance or correlation
coefficient indicates that the investments’ returns tend to move together.
NOTE ONLY / COVARIANCE
If a portfolio manager intends to hold real estate assets for the long-term, they might use diversification as a defensive measure. A negative covariance in this portfolio may be a good thing since all properties will not likely be impacted by the same negative events, to the same degree, e.g., change in interest rates.
On the other hand, if you are confident about your ability to predict trends and you take the short-term view, positive covariance may be good thing since you are banking on a combination of favourable market conditions impacting your entire portfolio.
NOTE ONLY / COVARIANCE
If a portfolio manager intends to hold real estate assets for the long-term, they might use diversification as a defensive measure. A negative covariance in this portfolio may be a good thing since all properties will not likely be impacted by the same negative events, to the same degree, e.g., change in interest rates.
On the other hand, if you are confident about your ability to predict trends and you take the short-term view, positive covariance may be good thing since you are banking on a combination of favourable market conditions impacting your entire portfolio.
NOTE ONLY / DIVERSIFICATION
Portfolio diversification can take many forms:
a large number of the same property type in different market areas; e.g., all neighbourhood retail;
mixed property type portfolio; e.g., office, retail, industrial;
retail and office properties that are distressed, offering opportunities for re-leasing and value appreciation;
properties in different countries with different risk parameters;
a range in the size of properties: e.g., combination of Class A, B, and C office properties; or
any combination of the above parameters.
NOTE ONLY / DIVERSIFICATION
Portfolio diversification can take many forms:
a large number of the same property type in different market areas; e.g., all neighbourhood retail;
mixed property type portfolio; e.g., office, retail, industrial;
retail and office properties that are distressed, offering opportunities for re-leasing and value appreciation;
properties in different countries with different risk parameters;
a range in the size of properties: e.g., combination of Class A, B, and C office properties; or
any combination of the above parameters.
Diversification is _ _ _ _ _ _ _ _
Diversification is the combining of investments whose returns are less than perfectly positively correlated in order to reduce portfolio risk without sacrificing portfolio returns.
TRUE OR FALSE?
A negative correlation, diversification can substantially reduce portfolio risk.
ANSWER: TRUE
We can define portfolio risk as falling into one of two broad categories:
[LIST & EXPLAIN]
1. a diversifiable risk component – the variability of investment returns which can be offset in an investor’s portfolio through the acquisition of assets with less than a perfect positive relationship amongst themselves; and
2. a non-diversifiable risk component – the portion of the return variability that cannot be offset through diversification.
_________ diversification is the acquisition of different properties within a particular local market, whose property returns are not closely related.
Intra-market diversification is the acquisition of different properties within a particular local market, whose property returns are not closely related.
________ diversification is the formation of real estate portfolios consisting of properties located in different real estate markets, with the returns on these assets not having high levels of positive correlation.
Inter-market diversification is the formation of real estate portfolios consisting of properties located in different real estate markets, with the returns on these assets not having high levels of positive correlation.
Intra-market diversification is attractive to many small to medium investors for a number of reasons:
[LIST 3]
Intra-market diversification is attractive to many small to medium investors for a number of reasons:
reduced costs for due diligence by focusing on local properties;
easier to verify property physical attributes and financial performance; and
investors can apply their local market knowledge and experience, or qualitative metrics, to qualitative measures when evaluating acquisition decisions.
NOTE ONLY / Inter-market Diversification
An inter-market diversification strategy involves the acquisition of properties located in different real estate markets with the returns on these assets not having high levels of positive correlation.
With inter-market portfolios the investor makes use of divergent investment behaviour in these markets to reduce his overall portfolio risk. While there are still broader macro forces such as national economic conditions and mortgage interest rates which have a common impact across these markets, we expect the levels of non-diversifiable risk should be lower than those found in the intra-market case.
As noted earlier, there are downsides to this strategy: greater expenses for property search and due diligence, and potential reduced investor understanding of local markets.
NOTE ONLY / Inter-market Diversification
An inter-market diversification strategy involves the acquisition of properties located in different real estate markets with the returns on these assets not having high levels of positive correlation.
With inter-market portfolios the investor makes use of divergent investment behaviour in these markets to reduce his overall portfolio risk. While there are still broader macro forces such as national economic conditions and mortgage interest rates which have a common impact across these markets, we expect the levels of non-diversifiable risk should be lower than those found in the intra-market case.
As noted earlier, there are downsides to this strategy: greater expenses for property search and due diligence, and potential reduced investor understanding of local markets.
