- April 2012: Vol. 24 No. 4

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Managing Risk: Exploring the Realm of Possibility, Part II: Investors Must Constantly Monitor an Asset’s Inherent Risks

by Marc Louargand

In light of recent and ongoing events in global capital markets, institutional investment managers have begun to look at portfolio risk differently. Real estate portfolios inevitably will be part of portfolio-wide changes in risk management practices. One element of the change is that instead of buying assets that have some level of risk, investors are seeking appropriate amounts of risk by selecting the asset mix that provides that level. It is a subtle difference but an important one. Making that distinction requires that the assets be understood in terms of their absolute risk as opposed to their relative risk.

Historically, investment strategies and investment managers have been evaluated on a relative basis against a benchmark. Using traditional statistical analysis developed in the securities markets, real estate portfolio risk was measured against a benchmark, such as the NCREIF Property Index (NPI) or one

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