The schweser notes state that Real Estate has “large idiosyncratic risk component; provides good diversification”, p.61.
How you can have good diversification if you have large idiosyncratic risk?
Isn’t another word for idiosyncratic risk = diversifiable risk?
is it saying it is diversified in terms of not being correlated with the stock market? But not diversifying because each investment is relatively large and therefore may represent a large portion of an investor’s portfolio.
it is diversifying but also not diversifying… I’m confused!? Someone plz help!
Idiosyncratic risk refers to the unique risk exposures compared with traditional asset classes, so a direct investment in real estate can move independently of stock/bond returns as it is not sensitive to the same risk factors and is therefore diversifying.
Idiosyncratic risk is to me unsystematic risk, so yea, real estate is quite property-specific and as such, provides good diversification but be wary of the idiosyncratic risk
Poorly worded, idiosycratic risk doesn’t mean anything in this context.
What they meant was. real estate had weak correlation with all the other asset classes, the same goes for alternative investments in general. But they all have high idiosyncratic risk, mainly due to liquidity issues, but also due to uniquness.