Problem inputs:

Std Dev US real estate: 0.14

Covariance with GIM: 0.0075

Integration with GIM: 0.60

Sharpe ratio of US real estate: n/a

Sharpe ratio of GIM: 0.36

Rf = 3.1%

Expected return of GIM = 7.2%

Cortez’s colleague Jason Grey notes that US real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the international extension of the CAPM and assumes a correlation of 0.39 between US real estate and the GIM.

Question: what is the expected return for US real estate?

Answer: 6.3%

First, calculate the fully integrated risk premium (I got this correct), 14.0% × 0.39 × 0.36 = 1.97%

Second, calculate the fully segmented risk premium, 14.0% × 0.36 = 5.04%. *I don’t understand why it uses the sharpe ratio of GIM. It should be the sharpe ratio of the segmented market (which is N/A).*

Finally, calculate the weighted average with integration as weight.

Thanks a lot!