19 - Portfolio Considerations - ch. 22

ucla | MGMT 170 | 2023-06-07T11:02

Table of Contents

Supplemental

  • risk = volatlity of returns
  • interest rate increase → property value down
  • inflation inc → property value up
  • inflation ince → interest rate increase (delayed, reactionary)

Lecture

  • risk vs return
    • investments w more risk should provide a higher expected return
    • beta is a measure of volatility of returns relatiive to a benchmark
    • alpha is a measure of actual return relative to a benchmark GIVEN the level of risk
  • property performance information
    • unlike stock and bond markets, real estate performance iinfo is scarce
    • Natiional Councl of Real Estate Investment FIduciaries (NCREIF) creates quarterly returns for Office, Retaiil, Apartmentm, Industrial, and Hotel property types → based on appraisal - imperfect market value
    • NCREIF index is unleveraged
    • REIT stock price performance is a proxy for certain types of real estate. performance → but also affected by non-real estate factors in market moves
  • business risk
    • speciific to property type, location, and market. conditions
  • default risk
    • properties are usually. leveraged → higher LTVs = higher default risk
  • liquidity risk
    • selling prooperty takes tim → real estate is an illiquid investment
  • diversification
    • lower volatiliity of expected returns by diversifying risk through many investments
  • correlation coefficient
    • measurees relative move. of one criteria to another
    • +1 (positively. correlated), 0 (no correlation), -1 (negative corrlation)
  • inflation hedge
    • real estate is usually a good inflation hedge → positively corrlated with inflation
    • when nflation inc. → property values go up
  • portfolio diversiffication
    • buying properties of diffferent types and loacations → greater diversification
  • global diversification
    • increase variety of opportunities around the world gives diversification from correlation to US → may reduce protfolio risk
    • foreign invetmnts have other risks
  • foreign investmnt risks
    • information risk
    • legal and tax an riights risk
    • currency and iinterest rate risk
    • political risk
    • culture/communicaton risk

Discussion

Resources

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