Can you please help me with tis question: In order to diversify their portfolio,
ID: 2618805 • Letter: C
Question
Can you please help me with tis question:
In order to diversify their portfolio, real estate investors should have exposure to different real estate property types, classes and geographic locations.
a. Is it more difficult to hold a diversified direct real estate investment portfoliocompared to a diversified stock portfolio? Why?
b. What is a common alternative to holding a direct real estate investment portfoliothat provides investors diversification with ease?
c. What type of risk is eliminated with diversification? What type of risk remains?
d. Is the benefit of diversification when applied to real estate smaller or larger thanthe benefit of diversification when applied to a stock portfolio? Briefly explain.
Explanation / Answer
Answer A) Despite of the big drop in property valuation at sub-prime crisis burst in 2008, real estate index has still outperformed stocks index over the last 20 years.So , it is still one of the most attractive assets of investment. It is more difficult to hold a diversified direct real estate , with following reasons;
b) Some common alternative to holding a direct real estate investment are
Answer C) Diversification is used to eliminate un-systematic risk , like risk of invesment in same area(city ) , fraud activity by one builder , ill liquidity in particular area etc.
there are some risk still remain witj investment even after diversification , some are : Economy risk , Crisis risk , sentiment or behaviour risk , political risk etc.
Answer d) The benefit of diversification when applied to Real estate is smaller than stock protfolio , as the prices of real estate is more or less interconnected and depend on the economic condition of market , which cannot be reduced by diversification . The recent sub-prime crisis can be one of the best example of the situation.