CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
Which characteristic of direct real estate investment most likely makes it difficult to construct a precisely diversified portfolio of properties?
Heterogeneity and large unit sizes most likely hinder diversification. Every property is unique and costly, so a smaller investor cannot easily hold many different assets. Real estate does not trade on centralized exchanges, and its income is not always fixed.
- AProperties are heterogeneous and have large unit sizesCorrect
- BProperties trade on centralized exchanges with standard contracts
- CProperty income is always contractually fixed for the life of the asset
Explanation
Each property is unique in location, type and condition, and units are large and lumpy, so investors need substantial capital to diversify. Real estate is traded in decentralized private markets, and lease income varies with lease terms and vacancies.
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