Is It Possible to Have a Zero-Beta Portfolio in Real Estate Investing?

By Published On: October 8, 20213.8 min read

Curious about the volatility of a particular asset, or even the risk level of your entire commercial real estate market portfolio? Wondering whether you should diversify, or whether you should take more investing risks?

If you’re trying to reach a zero beta portfolio, use beta. Beta is a statistic that helps measure risk and volatility to help you make decisions about your investments.

What Is Beta?

If you have multiple commercial real estate investments in your portfolio, they likely have multiple levels of risk, of making or not making a return on your investment, and losing money.

To determine that level of risk, investors use a statistic called beta that compares the volatility of the investment against the volatility of its market. Beta helps you determine how volatile an asset is or, in the case of your complete portfolio, a group of assets.

What Is a Zero-Beta Portfolio?

A zero-beta portfolio is built to have zero dependence on the market (like the S&P 500 or a stock exchange) and in theory, zero systematic risk. This is like a market portfolio, which is a theoretical portfolio that is perfectly diversified so its risk is only dependent on the market.

A portfolio with a beta of 1, or market portfolio, means the investments in the portfolio are highly correlated to the movements of the market, and just as volatile. Market volatility is also called systematic risk. If beta is more than 1, the portfolio or asset is as or more volatile and risky than the market, or has more systematic risk.

Adding an investment with a beta of more than one is likely to increase a portfolio’s risk. A beta of less than one means that only a portion of the investment’s returns are tied to the market. Adding an investment with a beta of less than 1 should decrease a portfolio’s risk.

With a zero-beta portfolio, you’d only have to worry about the risk-free rate. The risk-free rate of return is the amount of interest you could expect on your investment over a period of time. Again, while no investment is completely free of risk, this calculation helps you better understand your portfolio.

One more factor to consider is the Capital Asset Pricing Model (CAPM). The CAPM represents the relationship between market volatility and the return on assets (ROA). As an investor, you need to be compensated for your money’s time in the market. The CAPM uses the risk-free rate and together these formulas can help you get closer to a zero beta portfolio, or at least lower your risk.

What Is a Zero-Beta Asset in Commercial Real Estate?

A zero beta asset is, similar to a zero beta portfolio, an asset with a beta of zero, correlated with a particular market. It’s the individual assets that, taken together, will tell you how volatile your portfolio is as a whole. Low or zero beta portfolios are easier to create with a diversified portfolio of private CREF assets i.e. bank loans, private equity or debt funds, or other types of commercial real estate loans than they are with public real estate investments, i.e. real estate investment trusts (REITs).

Is It Possible to Have a Zero Beta Portfolio in Real Estate Investing?

If you’re a risk-averse investor, but you’re interested in getting into the real estate game, you might be wondering if it’s possible to have a low or zero beta portfolio at all. After all, real assets tend to be as illiquid investments as you can get.

To reach something like a zero beta portfolio in real estate, your best option would be to invest in private financing assets and in REITs. Both are liquid and tend not to be very volatile, even in a recession.

Whether shooting for a zero beta real estate portfolio is worthwhile is another question — one that is entirely up to you.

Bottom Line: Stability vs Risk

Measuring beta is about measuring systemic risk, and how closely your individual investments or entire investment portfolio. If you have a zero-beta portfolio, that means it has no market exposure. The movements of a particular market won’t impact its performance. They’re more attractive in slower markets where investors are skittish about risk, but less so in bull markets when they’re more convinced the risks have greater rewards.

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