Student Number : 9005994G -
MSc research report -
School of Construction Economics and Management -
Faculty of Engineering and the Built Environment / The objectives of this research are to assess the returns, risks and correlation of
a mixed-asset portfolio, establish the role of real estate in a mixed-asset
portfolio and suggest an appropriate real estate allocation in the South African
pension fund industry. The issue of low real estate allocation has been a subject
of interest to practitioners and academics, both locally and internationally,
despite the diversification benefit that real estate provides in a mixed-asset
portfolio.
A statistical approach was considered most the appropriate tool for analyzing
returns. Solver optimizer in the excel spreadsheet package was used to
generate efficient frontiers and the associated values of portfolios. Real estate
provided a lower return of 1.25% and a lower standard deviation of 4.90%
compared to equities with a return of 1.39% and the highest standard deviation
of 6.23%, whilst bonds provided the best risk-return trade off, with a return of
1.42% and the lowest standard deviation of 2.64%. An equally -weighted
portfolio consisting of bonds and stocks and a portfolio consisting bonds, stocks
and real estate was simulated. The equally -weighted portfolio of bonds and
stocks provides a return of 1.41% and a standard deviation of 3.76%. The
minimum variance with bias to bonds provides a higher return of 1.42% at a
lower level of risk of 2.62%. The equally -weighted portfolio consisting of bonds,
stocks and real estate provides a return of 1.35%, with a lower risk of 3.49%.
The minimum variance with bias to bonds provides almost the same return of
1.40% at a lower level of risk of 2.54% compared to the bond and share
portfolio.
The Chi-Square statistical tool was used to test the diversification benefit of real
estate. It can be concluded that the standard deviation of the portfolio with
property is close enough to the standard deviation without property of 3.76%
and cannot statistically say that it is different given the 5% level of significance.
The Sharpe ratio was used to test the favourable risk adjusted returns offered
by real estate. It concluded that property provides favourable risk adjusted
returns and diversification benefits, as illustrated with the increasing portfolio return from 7.44% to 8.66% on Sharpe ratio basis and standard deviation of the
portfolio decreasing from 3.76% to 2.54%.
The literature review generally supported the view that real estate has a role in a
mixed-asset portfolio. Research topics such as securitized versus unsecuritized
real estate, real estate allocation and diversification, returns and risk, inflation
hedging, modern portfolio theory and the efficient -frontier were analysed and
related to the research report.
The empirical analysis supports the hypothesis that real estate provides
diversification benefits. The property cycle is positive and it is supported by
positive property fundamentals like (vacancies are at lowest levels,
capitalisation rates are strengthening, the property cycle is turning positive and
a stable interest rate environment). The positive property fundamentals will lead
to earnings growth.
An allocation of between 10% based on the lower end of the minimum variance
and 15% based on the lower end of the risk/return ratio is recommended for a
mixed-asset portfolio.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/1668 |
| Date | 14 November 2006 |
| Creators | Ramushu, Herbert Tiaoleng |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | 357836 bytes, 23489 bytes, 11693 bytes, 7189 bytes, 443070 bytes, 15338 bytes, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf, application/pdf |
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