Managerial Finance and Financial Markets Essay Example | Topics and Well Written Essays - 1500 words - 1

Managerial Finance and Financial Markets - Essay Example commercial property can be used as an alternative investment during periods of high inflation, which is possible because of its low correlations with bonds and stocks. More so, the inclusion of commercial property in the portfolio will offer regular streams of income, for example in form of rent, which can be adjusted periodically thus shielding the investor from the effect of high inflation. The force behind commercial estate returns, from macroeconomics viewpoint, is different from that of equity and bonds. In this view, commercial property is an ideal source of portfolio diversification. Furthermore, the commercial property is in itself diversified, hence its performance is very unique. Commercial property can be used to diversify unsystematic risk, but not systematic risk. The reason why it is difficult to diversify systematic risk is because it influences a large number of assets (Case, 2014). The diversification, in this case, depends on risk-adjusted returns, the investor’s horizon and correlations (as shown in Table 1). Some of the types of diversification that can be generated from commercial property include that between private and public real estate, between bonds and equity, by property type, by investment strategy, within domestic market (geographically), and between domestic and foreign market. International diversification, whereby investors venture into international real estates, is a potential means of reducing risk as it offers very low return correlations. For example, by investing internationally, investors achieve low performance fluctuations, in a manner that cannot be achieved locally (Hudson-Wilson, Fabozzi & Gordon, 2003). Commercial property, relative to other asset classes, has been historically known to offer higher returns. However, in the long term, although commercial property is expected to generate a lower return compared to public equities, it is expected to perform better than bonds. Even though this relationship has