Deck 22: Real Estate Investment Performance and Portfolio Considerations

Question 1

Assume you have a choice between investing in either an equity REIT or Microsoft stock MSFT). Which point in the figure above is NOT on the efficient portfolio frontier?

A) A
B) B
C) C
D) All points are on the efficient portfolio frontier

Answer 1

A

Question 2

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

Answer 2

False

Question 3

Much like the securities markets, there is a large, centralized collection of real estate transactions and operating income data.

Answer 3

False

Question 4

An investor in a mortgage REIT is basically buying equity shares of an entity whose assets are mainly mortgages.

Question 5

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

Question 6

In comparison to portfolios comprised entirely of corporate stocks and bonds, investment portfolios which include some form of real estate investment as indicated by EREIT and FRC returns in the text) tend to offer lower levels of risk for equivalent returns.

Question 7

Using the information provided in the previous question, what is the geometric mean return on the investment?

A) -2.6%
B) +2.6%
C) +5.0%
D) +8.0%
E) Cannot be calculated from the information provided

Question 8

As long as the coefficient of correlation between two stocks is less than +1, some reduction in risk can be obtained by combining the securities.

Question 9

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

Question 10

Both levered and unlevered properties are included in the FRC Property Index.

Question 11

The FRC Property Index can be characterized by each of the following EXCEPT:

A) The index includes only properties with no outstanding mortgage debt
B) The information used in compiling the index is voluntarily contributed by property owners
C) The index reflects payments to both property managers and portfolio asset managers
D) All of the above are true

Question 12

If two securities have the same positive mean returns and they are perfectly, negatively correlated, an investor in such securities will earn a positive return with zero risk.

Question 13

What statistical concept do many portfolio managers use to represent risk when considering investment performance?

A) The standard deviation of returns
B) The difference, or "spread," between the highest value over the holding period and the lowest value over the holding period
C) The geometric mean return
D) The coefficient of variation

Question 14

On January 1st, an investor purchases security A for $105. Over the next four months, dividends totaling $15 were paid on security A) On March 31st, security A was sold for $120. What is the holding period return for security A?

A) 0.0%
B) 14.3%
C) 25.0%
D) 28.5%

Question 15

It is difficult to compare the investment performance of real estate with stocks and bonds because when properties do sell, the sale price is generally not publicly available.

Question 16

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) -2.6%
B) +2.6%
C) +5.0%
D) +8.0%
E) Cannot be calculated from the information provided

Question 17

The NCREIF index measures the investment performance of real estate by using actual sale prices.

Question 18

When used to evaluate the performance of an investment, the geometric mean is considered to be superior to the arithmetic mean.

Question 19

When comparing investment alternatives, the standard deviation is deemed to be a measure of risk.

Question 20

The FRC Property Index includes property value increases or decreases only when properties are sold since the sale price is the only true measure of market value.

Question 21

The optimal combination of securities that provides the greatest amount of return for each level of risk is know as:

A) The expected frontier
B) The economic frontier
C) The efficient frontier
D) None of the above

Question 22

One would see the greatest amount of diversification from two securities that are:

A) Positively correlated
B) Negatively correlated
C) Not correlated
D) Perfectly correlated

Question 23

The variability on an asset's returns represents:

A) Flexibility
B) Profitability
C) Risk
D) Default

Question 24

Regarding real estate investments, risk that is associated with the type of property and its location, design, lease structure, and so on can be thought of as:

A) Marketability risk
B) Liquidity risk
C) Business risk
D) Interest rate risk

Question 25

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) 0.005
B) 0.115
C) 0.673
D) 1.485

Question 26

The unit of measure that is used by portfolio managers to measure returns for individual securities on a periodic basis is the:

A) Return on investment ROI)
B) Holding period return HPR)
C) Geometric mean return
D) Arithmetic mean return

Question 27

Which of the following provides a measure of the extent to which returns tend to move together or have no relationships?

A) The coefficient of determination
B) The variance
C) The coefficient of variation
D) The covariance

Question 28

If the returns of two securities are compared over time and there appears to be no relationship between their movements, what is the likely value of their coefficient of correlation?

A) +1
B) -1
C) 0
D) +∞ infinity)

Question 29

The coefficient of variation of the returns, also known as the risk-to-reward ratio, is defined as:

A) The standard deviation of returns divided by the mean return
B) The variance of return multiplied by the mean return
C) The variance of returns divided by the standard deviation of returns
D) None of the above