REITs and Portfolio Diversification. Capital Asset Pricing Models (CAPM) A. Risk compensation 1. unique vs. systematic risk 2. idiosyncratic vs. nondiversifiable.

Slides:

Advertisements

Similar presentations

Pricing Risk Chapter 10.

Advertisements

The McGraw-Hill Companies, Inc., 2000

Risk and Rates of Return

Chapter 8 Risk and Return—Capital Market Theory

Risk-Return Problems 7. Calculating Returns and Deviations Based on the following information, calculate the expected return and standard deviation for.

11-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Diversification and Portfolio Management (Ch. 8)

Today Risk and Return Reading Portfolio Theory

FINANCE 10. Capital Asset Pricing Model Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2007.

Chapter 8 Diversification and Portfolio Management  Diversification – Eliminating risk  When diversification works  Beta – Measure of Risk in a Portfolio.

Portfolio Analysis and Theory

Chapter 5 Risk and Rates of Return © 2005 Thomson/South-Western.

Defining and Measuring Risk

Vicentiu Covrig 1 Portfolio management. Vicentiu Covrig 2 “ Never tell people how to do things. Tell them what to do and they will surprise you with their.

Introduction to Risk, Return, and The Opportunity Cost of Capital

On risk and return Objective Learn the math of portfolio diversification Measure relative risk Estimate required return as a function of relative risk.

CHAPTER 10: Risk and Return, The Capital Asset Pricing Model

Portfolio Theory & Capital Asset Pricing Model

Introduction to Risk and Return

5b.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Chapter.

FIN638 Vicentiu Covrig 1 Portfolio management. FIN638 Vicentiu Covrig 2 How Finance is organized Corporate finance Investments International Finance Financial.

Risk, Return, and the Capital Asset Pricing Model John Marron.

 Introduction to Risk, Return, and the Opportunity Cost of Capital Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will.

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

11-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Risk, Return, and Security Market Line

1 Investments: Risk and Return Business Administration 365 Professor Scott Hoover.

Expected Return for Individual Stocks

Ch 6.Risk, Return and the CAPM. Goals: To understand return and risk To understand portfolio To understand diversifiable risks and market (systematic)

Risks and Rates of Return

Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western 5191 Natorp Blvd. Mason, OH Chapter 11.

Risk and Capital Budgeting Chapter 13. Chapter 13 - Outline What is Risk? Risk Related Measurements Coefficient of Correlation The Efficient Frontier.

Return and Risk: The Capital-Asset Pricing Model (CAPM) Expected Returns (Single assets & Portfolios), Variance, Diversification, Efficient Set, Market.

Portfolio Management Grenoble Ecole de Management MSc Finance 2011.

Chapter 4 Risk and Rates of Return © 2005 Thomson/South-Western.

Return and Risk for Capital Market Securities. Rate of Return Concepts Dollar return Number of $ received over a period (one year, say) Sum of cash distributed.

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 5 Risk and Return.

Chapter 7 – Risk, Return and the Security Market Line  Learning Objectives  Calculate Profit and Returns  Convert Holding Period Returns (HPR) to APR.

FIN 351: lecture 6 Introduction to Risk and Return Where does the discount rate come from?

Real Estate Investment Performance and Portfolio Considerations

Chapter 4 Appendix 1 Models of Asset Pricing. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-1 Benefits of Diversification Diversification.

Chapter 06 Risk and Return. Value = FCF 1 FCF 2 FCF ∞ (1 + WACC) 1 (1 + WACC) ∞ (1 + WACC) 2 Free cash flow (FCF) Market interest rates Firm’s business.

CAPM Capital Asset Pricing Model By Martin Swoboda and Sharon Lu.

Efficient Diversification CHAPTER 6. Diversification and Portfolio Risk Market risk –Systematic or Nondiversifiable Firm-specific risk –Diversifiable.

11-1 Lecture 11 Introduction to Risk, Return, and the Opportunity Cost of Capital.

Real Estate Investments David M. Harrison, Ph.D. Texas Tech University  Expected Rate of Return -  Example: Risk & Return.

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 5 Risk and Return.

FIN 819: lecture 4 Risk, Returns, CAPM and the Cost of Capital Where does the discount rate come from?

Finance 300 Financial Markets Lecture 3 Fall, 2001© Professor J. Petry

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

Risk and Return: Portfolio Theory and Assets Pricing Models

1 Estimating Return and Risk Chapter 7 Jones, Investments: Analysis and Management.

Ch 13. Return, Risk and Security Market Line (SML)

Capital Market Theory (Chap 9,10 of RWJ) 2003,10,16.

Chapter 11 Risk and Rates of Return. Defining and Measuring Risk Risk is the chance that an unexpected outcome will occur A probability distribution is.

Return and Risk: The Asset-Pricing Model: CAPM and APT.

13-0 Return, Risk, and the Security Market Line Chapter 13 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Lecture 7 Introduction to Risk, Return, and the Opportunity Cost of Capital Managerial Finance FINA 6335 Ronald F. Singer.

1 Stock Valuation Topic #3. 2 Context Financial Decision Making Debt Valuation Equity Valuation Derivatives Real Estate.

2 - 1 Copyright © 2002 by Harcourt College Publishers. All rights reserved. Chapter 2: Risk & Return Learning goals: 1. Meaning of risk 2. Why risk matters.

1 CHAPTER 6 Risk, Return, and the Capital Asset Pricing Model (CAPM)

Copyright © 2011 Pearson Prentice Hall. All rights reserved. Risk and Return: Capital Market Theory Chapter 8.

FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 8 RN)

Chapter 11 Learning Objectives

Graph of Security Market Line (SML)

FIGURE 12.1 Walgreens and Microsoft Stock Prices,

Corporate Finance Ross  Westerfield  Jaffe

The McGraw-Hill Companies, Inc., 2000

Introduction to Risk & Return

Presentation transcript:

REITs and Portfolio Diversification

Capital Asset Pricing Models (CAPM) A. Risk compensation 1. unique vs. systematic risk 2. idiosyncratic vs. nondiversifiable B. Appropriate market portfolio 1. stock and/or bond markets typically used 2. real estate estimated to comprise 50% of US stock of wealth vs 20% for stocks  stock market risk may be diversifiable

C. market risk and beta 1. R f = risk-free return 2. R m = market return 3. R re = real estate return

Definitions Expected Portfolio Return (2 stocks): –Weighted average of each stock’s expected return.

Definitions Portfolio Variance: –sum of share-weighted averages of the variances of stock returns plus the covariances among stock returns.

Definitions Covariance: –absolute measure of the extent to which 2 stocks move together over time. Positive Covariance - 2 assets move together Negative Covariance - 2 assets move apart Gives contribution of stock to overall portfolio risk

Definitions Correlation: –relative measure of the extent to which 2 stocks move together. Perfectly Positive = +1 Perfectly Negative = -1

Definitions Portfolio Variance – reprise

Portfolio Diversification Now consider the “market” portfolio. –How many stocks are in the market? Assume market composed of “N” stocks.

Portfolio Diversification Out of the “N” stocks in the market, let’s assume that #2 represents the return on REITs. How do you measure the REIT contribution to the overall portfolio risk? –Answer: Covariance

Portfolio Diversification Let’s look at the “N” stock market variance/covariance matrix –Gives contribution of each stock to portfolio risk.

Portfolio Diversification The Marginal Risk of REITs = –Covariance of REIT and market divided by overall market risk.

Portfolio Diversification Note that:

Portfolio Diversification Thus: Note:

Portfolio Diversification So what’s the point? –Compound Annual Returns ( ): REITs  10.79% S&P 500  11.59% Russell 2000  11.44% NASDAQ  11.18%

Portfolio Diversification So what’s the point? –20-year Standard Deviation of Annual Returns ( ) REITs  16.5% S&P  19% NASDAQ  29%

Portfolio Diversification So, what’s the point? –Correlation: REIT & S&P500  0.25 REIT & NASDAQ  0.13 REIT & Russell 2000  0.40

Portfolio Diversification So, what’s the point? REITs provide diversification benefits to portfolios.