How To Treat Real-Estate, Venture Capital, Private Equity

CFA Level III
#1

I have noticed ine one of the Schweser questions where an investor had an average willingness and ability to take risk and a return requirement of 6.7% and the recommended portfolio had the following breakdown: 55% Stocks 25% Bonds 10% Real-Estate 5% Venture Capital 5% Cash I realize that historically, real-estate has been a good hedge and is a good complement to equities, but do most of you feel that the above break-down represents an average/balanced portfolio? Curious what your thoughts are and how you will treat Real-Estate and Venture Capital if asked this on an exam. What will your justification be? PJStyles

#2

i would say it is a skewed portfolio with 70% in equity of which 15% are highly illiquid. for a 6.7% return requirement, this portfolio seems to be an overkill.

#3

I couldn’t agree more, hence why I was puzzled by Schweser suggesting it was the appropriate portfolio for them.

#4

i guess you have to look at it relative to what the other portfolios in the question look like … i would also look at the liquidity/ income requirements for the person …in this case 15 % of the portolio is not very liquid and i would not recommend it for somebody with high liquidity/ spending needs

#5

55% Stocks - most likely liquid 25% Bonds - most likely fairly liquid, depends on teh issue, but we’lls ay liquid 10% Real-Estate - depends if its direct or indirect (REITS) can be liquid 5% Venture Capital - definitely illiquid 5% Cash - highly liquid It all depends on the circumstances and time horizon of the individual. Real-estate is a good diversifier and you can get exposure via REITS you dont ‘have’ to buy a house or building… Venture Cap is also a nice diversifier with a potential big upside, but illiquid and possibility of losing investment.

#6

Why would you put venture capital in a portfolio with average willingness and ability to take risk?

#7

venture capital although risky on its own in the context of the portfolio (key level III concept) may be an excellent addition given what including VC may do to the risk adjusted returns.

#8

I see… thanks!

#9

I have given up on this long time ago.

#10

Prudent Investor rule…they tripped us in L2 ethics with this.

#11

I still want to know what the true answer was for the L2 question!!! B/c it could have gone either way, depending on the viewpoint you took and how far you were going to analyze the question when they tell you nto to over analyze the queston…ahahaha