Real Estate Analysis: A
Marriage between Macro and Micro
¨Marriage Example 2:
¨Say City B Residential (RET), Office (OFF), and Retail
(RET) Sectors have volatilities of 0.15, 0.25, and 0.30 respectively
[Macro] and they all correlate to one another.
¨Say 2 same scale projects with similar attributes:
1) Mixed = 50% RES, 30% OFF, and 20% RET; and 2) Pure
Office, 100% OFF.
¨In terms of Risks, Project 1 is ([50% x 0.15]+[30%
x 0.25]+[20% x 0.30])=0.21 and Project 2 is [100% x
0.25]=0.25.
¨IF investor is risk adverse, assuming all else being
equal, he or she will pick Project A.