1. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University  In general, the riskiness of a portfolio (  portfolio ) will -  Systematic vs. Diversifiable Risk Portfolio Risk

2. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Beta  Beta Defined -   Examples: F Beta = 1.0 F Beta = 0.5 F Beta = 2.0 F Beta < 0.0

3. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Calculating Beta  Plot the investment’s return over time against the market’s return over time. Fit a (regression) line to the observations. The slope of the line is the firm’s estimated beta coefficient. Example #1: Given the following information, calculate the firm’s beta coefficient. YearMarket ReturnInvestment Return 1 8.4% 10.1% 2 10.2% 12.7% 3 2.3% 6.5% 4 15.6% 22.1% 5 -7.9% -9.3% Estimated OLS Regression Line: Correlation Coefficient:

4. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Calculating Beta, cont.  Plot the investment’s return over time against the market’s return over time. Fit a (regression) line to the observations. The slope of the line is the firm’s estimated beta coefficient. Example #2: Given the following information, calculate the firm’s beta coefficient. YearMarket Return Investment’s Return 1 6.6% 5.9% 2 -2.3% 4.6% 3 -14.5% 3.6% 4 7.1% 4.8% 5 15.9% 6.8% 6 18.3% 8.8% Estimated OLS Regression Line: Correlation Coefficient:

5. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Portfolio Betas  The Beta of a portfolio is -  Example: Calculate the beta of the following 3 asset portfolio: Investment BetaPortfolio Weighting Growth Stocks1.50 20% Real Estate2.50 30% Corporate Bonds0.90 50%

6. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Integrating Risk & Return Required Return = Risk-Free Return + Premium for Risk  Security Market Line (SML) - Required Return on Security I =

7. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University SML Examples  Ex. #1: Suppose Lennar Homes, Inc. has a beta of 2.0 (i.e. its returns are twice as volatile, and tend to move in the same direction as, market returns). If the risk free rate of interest in the economy is 5%, and the risk-premium available on an average (Beta = 1.0) security is 3.5%, what is the required rate of return on Lennar Homes?  Ex. #2: Suppose the required rate of return on the market portfolio was 11%, the risk- free rate was 4%, and you were considering investing in D.R. Horton which has a beta of 1.85. What is your required rate of return on D.R. Horton?

8. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Implementing the SML  Graphing the SML:  Complications: F Inflation - F Risk Aversion - F Changing Betas -

9. Real Estate Investments David M. Harrison, Ph.D. Texas Tech University Investment Decisions & The SML  Decision Rules: If  Greater (Bigger) Fool Theory -