Diversification Benefits from Foreign Real Estate Investments  Case Solution

Market Volatility

Another issue is the market volatility and its impact on the investments and returns. Market volatility can cause high losses to investors and there is no appropriate method to analyze volatility and its impact on stocks. International real estate investment performs best in the event of greater market volatility.

Supporting case studies

In this case study, various other studies are  cited that support the subject matter of this case study. These previous studies have provided strong evidence that the international real estate investments enhance the portfolio investment diversification benefits.  The case study used analyzing tools to examine the subject matter on the practical side, using real world data. Foreign real estate is compared with American Stocks, American Real Estate, and other foreign stock investments. The case study also examines stock market crash, in relation to its impact on portfolio investment. In this way, the foreign real estate investment is evaluated to verify whether they still have greater mean variance efficiency in the event of high market volatility and integration. The trade off benefits between the risk and return on the foreign real estate investment is also examined in this case. Thus the case study provides a comprehensive analysis of the subject matter and has utilized the real world data and empirical and representative tools for analysis of such data.

The case study used the data from various reliable resources and found results in their calculations that support the subject matter of the case study. The results favor investing in the real estate. Nevertheless, it should be noted that the risk is also greater with these investments. For better understanding, the data is then analyzed using U.S dollars, since the study was conducted for the U.S investors. The result of such analysis is the same and provides that the foreign real estate investment is beneficial for the U.S investors.

 Correlation between the investments

Correlation analysis is made, and correlation coefficients are calculated on rolling basis using the monthly return data. The correlation analysis is made to identify the correlation between the U.S equity stocks and U.S real state, foreign real estate and foreign stock investment. The results from the case suggest that the foreign real estate has lower correlation and is consistent with time. Foreign real estate has lower correlation with U.S bonds. Even in the event of high market volatility, the returns remain stable from foreign real estate investment. Thus, the lower correlation indicates that U.S stocks are highly affected by volatility of the market, whereas the foreign real estate investment is hardly affected.

The case study has identified two exciting patterns, see graph above taken form the case. The foreign asset returns is in conflict with the U.S stock return patterns especially in the year 1993. The annual returns for U.S stocks, foreign stocks and foreign real estate in the year 1998 are 6.9%, 35.8% and 54.1% respectively. The second evaluation is that the U.S stock and foreign stock has lower correlation as compared to correlation between the U.S stocks and U.S real estate. Furthermore in the case study, it is just assumed, not merely demonstrated through evidence, that the lower correlation will be achieved by incorporating the foreign stocks in the investment portfolio and it will give diversification benefits as well.

In a case study conducted on the topic of global equity markets and international diversification, which is sought to determine whether the international diversified investment portfolio helps to achieve trade off in risk and return for the US investors (Global Equity Markets and International Diversification, n.d). It is concluded, that the U.S investor can earn more returns by investment in the U.S stock as compared to the international stock investment. While this research does not analyze the international real estate investment, the conclusion is that a U.S investor can get more return on the U.S stock investment and he can benefit more through diversifying investing by including foreign real estate investment………………….

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