# Essay on Modern Portfolio Theory and Real Estate

Submitted By j1251
Words: 3764
Pages: 16

Real Estate Portfolio Analysis
Optimizer
Peter Byrne and Stephen Lee

Real Estate
Portfolio
Analysis
19

Introduction
The modern spreadsheet is a powerful piece of software. The majority of spreadsheet users will never need most of the sophisticated features to be found in such a package, and many will not even be aware of the inherent functions and tools which exist within the spreadsheet. When spreadsheets are used to do advanced analysis, there is a need to take particular care. This requirement has been identified on several occasions (see for example [1-3 ch. 5]).
In a recent paper, Matysiak[4] suggests, with some justification but a certain lack of detail, the use of software called optimizers for looking at some kinds of real estate investment problems. He specifically considers the risk associated with capital and income cover and, more particularly, the risk-return trade-off in portfolio asset allocation under different scenarios using modern portfolio theory (MPT).
MPT has been advocated as a more rational approach to the construction of real estate portfolios[5]. This is a process which can now be achieved with relative ease using the powerful facilities found in spreadsheets, and does not necessarily require the use of specialist software. This capability is to be found in the use of an add-in tool found in several of the latest generation of spreadsheets, called an optimizer or solver.
What is an optimizer? In mathematical terms, any method which can be used for finding the optimum value (which may be a maximum or a minimum) of a function or expression f(x1, x2,…xn) of n real variables can be described as an optimizer. If, for example, the expression is concerned with measuring return, then normally we will seek to maximize that value. If the variable being considered is risk, then we will usually wish to find a result which minimizes the risk. Often the values of the variables may be limited or constrained in some way, and this in turn may affect the optimum value that can be achieved for the expression. In some instances we may wish deliberately to restrict the outcome by the way that we define these constraints, and hence observe the consequent change in the output value.
Vol. 5 No. 4, 1994, pp. 19-31