You have been asked to evaluate returns from your commercial real estate investm
ID: 2737589 • 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 property type and location:
a. Calculate the extent to which the Bluestone Fund is over- or (under)weighted by property type relative to the industry index.
b. Calculate the extent to which the Bluestone Fund is over- or (under)weighted by location/region relative to the industry index.
c. To what extent was the superior performance by Bluestone attributable to propertyselection and allocation in (A)?
d. To what extent was the superior performance by Bluestone attributable to property selection and allocation in (B)?
e. 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?
A. Bluestone Fund Industry Index %of Fund Weighted Return %of Index Value Weighted Return Property Type Value Return Return '8991 8.5% 7.0% Apartments Hotel Industrial Office Retail Total 14.4% 0.0% 13.5% 44.1% 28.3% 100.0% 13.0% 0.0% 85% 12.7% 8.6% 1.8% 0.0% 1.2% 5.6% 2.1% 11.0% 20.4% 2.1% 16.0% 37.2% 24.3% 100.0% 1.8% 0.2% 1.1% 2.8% 2.4% 8.3% 9.7% Bluestone Fund Industry Index %of Fund Weighted Return %of Index Value Weighted Return Location Value Return Return Type North South East West Total 6.3% 276% 43.3% 22.7% 100.0% 45% 8.6% 14.0% 9.9% 0.3% 2.4% 6.1% 2.2% 11.0% 11.0% 18.0% 34.0% 37.0% 100.0% 6.1% 72% 9.0% 8.8% 1.4% 3.1% 3.2% 8.3%Explanation / Answer
a) The extent to which the Bluestone Fund is over weighted by property type relative to the industry index:-
= 11 - 8.3 / 8.3 * 100
= 2.7 / 8.3 * 100
= 32.53 %.
b) The extent to which the Bluestone Fund is over weighted by property type relative to the industry index:-
= 11 - 8.3 / 8.3 * 100
= 2.7 / 8.3 * 100
= 32.53 %.
c) The extent of the superior performance by Bluestone attributable to property selection and allocation in (A):- [Property Type (Office) is taken as base.]
= 5.6 - 2.8 / 2.8 * 100
= 2.8 / 2.8 * 100
= 100 % [Relative to the industry index]
d) The extent of the superior performance by Bluestone attributable to property selection and allocation in (A):- [Location Type (East) is taken as base.]
= 6.1 - 3.1 / 3.1 * 100
= 3 / 3.1 * 100
= 96.77 % [Relative to the industry index]
e) As the standard deviation of returns for its Bluestone Fund of 10.0 is higher than that of 9.0 for index returns, thus the relative risk of Bluestone fund is higher.
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