Reading 34: Alternative Investm....olio Management－LOS g advantages, direct, equity, estate

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 34: Alternative Investments Portfolio Management
LOS g: Evaluate the advantages and disadvantages of direct equity investments in real estate.

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Direct equity real estate investing has all of the following advantages over indirect real estate investing EXCEPT:

A) tax deductible expenses.

B) the ability to use more leverage.

C) the ability to manage geographic diversification.

D) lower information costs.

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Answer and Explanation

Direct equity real estate investing has the following advantages: many expenses are tax deductible, the ability to use more leverage than other investments, having more control, and the ability to diversify geographically. Higher information costs are a disadvantage to direct real estate investing.

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Direct equity real estate investing has the following disadvantages over indirect real estate investing EXCEPT:

A) less control over the investments performance.

B) high commissions.

C) lack of divisibility.

D) political risk.

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Answer and Explanation

Direct equity real estate investing has the following disadvantages: lack of divisibility means a single investment may be a large part of the investors portfolio. There are high information cost, high commissions, high operating and maintenance costs, and hands-on management requirements. There are special geographical risks like neighborhood deterioration and the political risk of changing tax codes.

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Compared to stocks, direct equity investments in real estate have had:

A) higher volatility of returns.

B) lower volatility of returns.

C) about the same volatility of returns.

D) much higher average returns.

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Answer and Explanation

Lower volatility is the correct answer. The average return has actually been lower than those of stocks over the long-term.