Statement: “Adding direct real estate investments to a portfolio of equity and fixed income securities provides more diversification benefits than adding indirect real estate investments." Question in sample exam1: Based on information provided in Exhibit 2, Lytle’s statement about the relative benefits of direct versus indirect real estate investment is most likely correct because the portfolio with direct real estate investment has the: A. highest returns. B. highest Sharpe ratio. C. lowest standard deviation. Feedback: You have answered incorrectly. Correct Answer = B “Alternative Investments Portfolio Management,” Jot K. Yau, Thomas Schneeweis, Thomas R. Robinson, and Lisa R. Weiss 2009 Modular Level III, Vol. 5, pp. 21-27 Study Session 13-37-f Evaluate and justify the return enhancement and/or risk diversification effects of adding an alternative investment to a reference portfolio (for example, a portfolio invested solely in common equity and bonds). Portfolio 3 has 20 percent in direct real estate investment (NCREIF Unsmoothed) and it has the highest Sharpe ratio of 1.19 = (9.33 — 1.5) / 6.21. Why is this so? I know that sharpe ratio was higher, but diversifaction was also lower and the statement was about diversification…
I too marked Diversification… No idea why that is wrong
i got it wrong too, but i think CFAI ask for the “benefit” of diversification, that’s why you look at sharpe a portfolio might be more diversify but might not add risk-adjusted returns–> no benefit
You may be right. But then I really think it’s a tricky question…