Real Estate Investment Exam: Market Analysis, Risk & Strategies

This document provides solutions to a real estate finance exam, covering topics such as market analysis, investment returns, risk assessment, and diversification strategies. The exam includes multiple-choice questions and problem-solving tasks related to real estate market dynamics and investment decisions. The solutions demonstrate the application of analytical frameworks and models like the Capital Asset Pricing Model (CAPM) to evaluate investment opportunities and manage risk. It also addresses the importance of asset diversification, particularly geographic diversification, to mitigate economic and market risks in real estate investments. The analysis extends to specific sectors like the hotel industry, assessing the development risks associated with new construction projects.

Exam

QUESTION 1
1. (B)
2. (A)
3. (A)
4. (E)
5. (D)
6. (C)
7. (B)
8. (A)
9. (E)
10. (E)
11. (E)
12. (D)
13. (C)
14. (E)
15. (D)
16. (D)
17. (C)
18. (B)
19. (A)
20. (B)
21. (E)
22. (B)
23. (D)
24. (B)
25. (A)
26. (C)
27. (B)
28. (A)
QUESTION 3
(a)
Representation of a simple analytical framework which divides the real market estate into
two: market for the real estate space and the market for the real estate asset

(b)
The price of any asset is determined by moving from the NE quadrant representing the rent
level through the vertical axis all the way to the horizontal axis {price}
The SW quadrant is the market portion where the new assets are being constructed.
P=C Cost=f{c}
The final SE quadrant is where the annual flow of new assets are converted into the long
run stock of the real state space.
(c)
This graph is considered fundamental to the Real Estate Market because it helps in the
evaluation and analysis in a very impactful and critical manner and thus assists in the proper
reviewing of the data and its related aspects which can prove very beneficial for the industry in
an overall scenario in the general market.
(d)
Let suppose the total amount is 10000 then

Asset A= 10000*25%*11%= 275
Asset B= 10000*45%*14%= 630
Asset C= 10000*35%*16%= 560
Thus Asset B will give maximum return
QUESTION 4
(a)
Annual total return of the investment= Quarterly income return + Quarterly capital return
= (2.3*4) + (0.5*4)
=11.2
(b)
In the model which is Capital Asset Pricing Model the 2 risks is that the first one is that the
model requires to determine a beta value and thus it is difficult at times to find that while the
second risks is that it is very time consuming and thus it becomes problematic many a times. The
risk that cannot be reduced is the beta aspects as it is necessary to find a beta value without
which the model cannot function and thus this risk cannot be reduced. Sources of beta is that it is
calculated by dividing the security standard deviation of the returns by the benchmark standard
deviation of the returns.
(c) By the applying assets diversification reduce risk in real estate such like geographic
diversification. By applying this one should must apply in different assets to minimize the
economic as well as market risk. By keeping the money across assets like residential, retail as
well as warehousing. For example, if any one keep the property for longer time after that down
side risk of cyclic pitfalls would be averted and divest at the particular time.
(d) In the Hotel industry under construction there is lower risk because development risk is the
economic threat that the investor is exposed to converting a vacant piece of land to convert into
operation hotel asset. There is a negative relationship between the development cost or the future
investment returns.