Real Estate in the Mixed Asset Portfolio the Question of Portfolio Consistency Harvard Case Solution & Analysis

Data:

The data used in the excel sheet is the annual return of the property de-smoothed, which is also known as the direct real estate, equities, bonds and T-Bills representing the returns of last 35 years. In this case, the Mean and Standard Deviation are calculated so as to conduct a comparison among different asset classes by incorporating risk and return.

Table 1

Asset returns and risks 1980 - 2013

Property Index

Property De-smoothed

Equities

Bonds

T Bill

Average Return

9.73

9.73

13.82

10.62

7.67

Risk

9.67

9.67

15.81

11.38

4.77

Sharpe Ratio

0.21

0.21

0.39

0.26

0.00

The mean of the annual return and standard deviation for each of the three asset class and direct real estate are presented above in which higher return is showing that higher risk  is associated with equity security. It means that higher the risk is; the greater the return will be. On the other hand, the lowest return is in the Treasury Bills where risk associated with it is also low, which represents that lower risk will result in lower return.

Table 2:

Correlation Coefficients

Property De-smoothed

Equities

Bonds

T Bill

Property De-smoothed

1

Equities

1

1

Bonds

0.992382158

0.992382

1

T Bill

0.997812933

0.997813

0.998355

1

Table 2 is showing the correlation among asset classes and the correlation among three asset classes along with direct real estate almost 1, which is showing positive correlation that means that these asset classes as a single portfolio is efficiently organized and as a portfolio the risks associated with this is lower as compared to the negative correlation. It is because the direct real estate is already included in this portfolio which reduces the risks of this portfolio. The following graph represents the annual return of the portfolio, de-smoothed return and the portfolio return.

Annual Return:

De-smoothed Return:

Portfolio Return

Result:

The result of adding direct real estate into this mixed asset portfolio benefits in terms of maximum returns and minimum risks. The affect of adding the real estate security into portfolio is that it holds the initially estimated portfolio risk that is constant and then maximizes the return of a portfolio. It also shows how real estate is performing consistently with respect to the generation of returns.

CONCLUSION:

From the analysis, it is examined that the direct real estate also known as property de-smoothed is attractive with respect to the mixed asset portfolio in comparison with the other portfolios that are not included in the direct real estate security. It is because it holds the risk and return constant. Various issues were highlighted above in the mixed asset portfolio as it has the capability to consistently outperform the other portfolios through optimization. It is also showing constant positive allocation with respect to the time period by incorporating the historical data for calculating the real estate’s return series within the portfolio. It also attracts the investor to invest in those portfolios in which real estate security is included for a long period of time.

It can also be observed that any changes across the efficient frontier will be made to increase the return that will be incorporated in order to reduce risks. On the other hand, the asset that needs to be replaced depends upon investors’ decisions and willingness to increase returns and  minimize risk associated with it and vice versa. In addition, it has been observed that increasing the return of earning and the gain................................

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