Moss Moskowitz. Hmoskowitz@innerpropertymanagement.com
Be careful when you think about risk. One of the achievements of the Capital Asset Pricing Model (CAPM) was recognizing that the risk of an asset was not how the asset performed in isolation but how that asset moved in relation to other assets within a portfolio and the overall market. Before CAPM, risk was considered the asset’s own volatility. Advanced risk analysis of individual assets is usually better than the standard deterministic analysis. However, an asset whose standalone performance is very volatile may actually reduce overall portfolio volatility without sacrificing return is the correlation between the asset and the portfolio is low. Risk is not a characteristic of a single asset. The practice of real estate seems to ignore this important point.
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