1i. As an investment advisor for MREAF (Momentum Real Estate Advisory Fund), you are about to make a presentation to the portfolio manager of the ET&T pension fund. You would like to show what would have happened had ET&T made an investment in MREAF during the last 13 quarters. The ET&T manager has provided you with historical data on the performance of its portfolio, which is made up entirely of common stock. Historical data for the ET&T portfolio and MREAF are as follows:
a.Calculate the quarterly HPR for each investment.
b.Calculate the arithmetic mean HPR, the standard deviation of the HPRs, and the geometric mean for each fund. Which fund contained more risk per unit of return?
c.Was there any correlation between returns on the ET&T fund and MREAF?
d.Would a portfolio that contained equal amounts of ET&T securities and MREAF have provided any investment diversification? Why?
e.Optional. Assume each investment could have been combined in a portfolio with weights ranging from 0 percent to 100 percent. What pattern of risk and return would result if each investment were added (deleted) in increments of 10 percent (remember that the sum of the two proportions must always sum to 100 percent)? What combination of securities would have constituted the “efficient frontier” (if any)?
f.If the manager of ET&T is considering making an investment in MREAF, of what use is this analysis?
1ii. What are some of the difficulties of obtaining data to measure real estate investment performance?
2i Excel. Refer to the “Ch22_Frontier” tab in the Excel Workbook provided on the Web site. Suppose the correlation between NCREIF and the S&P 500 is -20 percent. How does this change the standard deviation of the portfolio when 50 percent of the portfolio is allocated to each investment?
2ii. What are the distinguishing characteristics between REIT data and the NCREIF Property Index?
3.What is the difference between arithmetic and geometric mean returns?
4.What statistical concept do many portfolio managers use to represent risk when considering investment performance?
5.When NCREIF returns and REIT returns are compared, NCREIF returns exhibit a much lower pattern of variation. Why might this be the case?
6.Mean returns for portfolios are calculated by taking the weighted average of the mean returns for each investment in the portfolio. Why won’t this approach work to calculate the standard deviation of portfolio returns?
7.What is the difference between covariance and correlation? Why are these concepts so important in portfolio analysis?
8.Results reported in the chapter showed that by including either REITs or the NCREIF Index in a portfolio containing S&P 500 securities, corporate bonds, and T bills, diversification benefits resulted. Why was this true? Did those benefits come about for the same reason for each category of real estate investment?
9.Results presented in the chapter are based on historical data. Of what use are these results to a portfolio manager who may be making an investment decision today? Elaborate.
10.Why should an investor consider investing globally?
11.What are the risks of global investment?
12.How can derivative security be used to hedge portfolio risk?