You have been asked to evaluate returns from your commercial real estate investm
ID: 2737604 • Letter: Y
Question
You have been asked to evaluate returns from your commercial real estate investment fund (Bluestone Fund) against an industry benchmark index to determine how successful your “active” investment strategy has been. Specifically, a potential client wants you to compare the performance of your portfolio strategy against a passive strategy of simply investing based on the same proportions of properties and locations comprising the index.
During the most current quarter, the following information has been provided to you based on the property type and location:
A.
Bluestone Fund
Industry Index
Property
Type
% of
Fund
Value
Return
Weighted
Return
% of
Index
Value
Return
Weighted
Return
Apartments
14.4%
13.0%
1.8%
20.4%
8.9%
1.8%
Hotel
0.0%
0.0%
0.0%
2.1%
8.5%
0.2%
Industrial
13.5%
8.5%
1.2%
16.0%
7.0%
1.1%
Office
44.1%
12.7%
5.6%
37.2%
7.6%
2.8%
Retail
28.3%
8.6%
2.4%
24.3%
9.7%
2.4%
Total
100.0%
11.0%
100.0%
8.3%
B.
Bluestone Fund
Industry Index
Location
Type
% of
Fund
Value
Return
Weighted
Return
% of
Index
Value
Return
Weighted
Return
North
6.3%
4.5%
0.3%
11.0%
6.1%
0.6%
South
27.6%
8.6%
2.4%
18.0%
7.8%
1.4%
East
43.3%
14.0%
6.1%
34.0%
9.0%
3.1%
West
22.7%
9.9%
2.2%
37.0%
8.8%
3.2%
Total
100.0%
11.0%
100.0%
8.3%
Calculate the extent to which the Bluestone Fund is over- or (under)weighted by property type relative to the industry index.
Calculate the extent to which the Bluestone Fund is over- or (under)weighted by location/region relative to the industry index.
To what extent was the superior performance by Bluestone attributable to property selection and allocation in (A)?
To what extent was the superior performance by Bluestone attributable to property selection and allocation in (B)?
Assuming that the standard deviation of returns for its Bluestone Fund was 10.0 and 9.0 for index returns, what may be said about the relative risk for the two funds.
Bluestone Fund
Industry Index
Property
Type
% of
Fund
Value
Return
Weighted
Return
% of
Index
Value
Return
Weighted
Return
Apartments
14.4%
13.0%
1.8%
20.4%
8.9%
1.8%
Hotel
0.0%
0.0%
0.0%
2.1%
8.5%
0.2%
Industrial
13.5%
8.5%
1.2%
16.0%
7.0%
1.1%
Office
44.1%
12.7%
5.6%
37.2%
7.6%
2.8%
Retail
28.3%
8.6%
2.4%
24.3%
9.7%
2.4%
Total
100.0%
11.0%
100.0%
8.3%
Explanation / Answer
a)It is overweight by 11%-8.3%=2.7%
b)It is overweight by 11%-8.3%=2.7%
c)Here "A" means I am assuming apartments. It is zero as the difference is 1..8%-1.8%=0
d)It is not clear what is "b" here
e)We can calculate coefficient of variation and say which is riskier
COV=standard deviation/Mean
For bluestone fund it is
=10/11%=0.91
For industry index=9/8.3=1.08
We can see it is lesser for bluestone fund and it is less riskier
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