Taurus Realty

It is the year 2004. You work for the consulting firm of Keene and Bright Associates, which has recently been asked by Taurus Realty to review the performance of their fund managers. Taurus Realty is a wholly owned subsidiary of Taurus Investments, an investment trust owned by the Zurgal family, with offices in New York, London and Nusaybin. The realty company is based in New York and managed by Lawrence Whitney. Taurus Realty has $4.5 billion invested in commercial, farm and residential properties in the United States. The fund investment proportions have remained virtually unchanged since 1960. They are:  Commercial Properties 60%, Residential Properties 10%, Farm Properties 30%.

Over the 25 years, the compound annual mean return (income and appreciation) of the portfolio has been 8.5% per year and the annual standard deviation of this return has been 7.5%. Whitney posed the following questions and issues:

1) Is this a reasonably good level of return and risk given the composition of the fund? What is a good benchmark mean and standard deviation for Taurus to expect from this asset class mixture?

2) Taurus tells you that they are considering rebalancing the composition of their fund. They want to sell off 1/3 of their commercial properties and re-allocate between residential and farm holdings. Do you recommend this? Provide a list of recommended real estate portfolio mixtures, based upon their plan to sell off $1 billion in commercial real estate.

The Commercial Portfolio

The commercial portfolio is composed of a few very large properties, as shown in Exhibit 1. Each holding is unleveraged. Taurus has estimated expectations of risk and return for the properties. These are reported in Exhibit 2.


3) What do you think of the estimated risk and return figures provided by Taurus?

4) What concerns to you have about such a portfolio? What are the positive features of the portfolio?

Leslie Altschuller is the manager of the commercial portfolio. She reports directly to Whitney, who has indicated that one of the four flagship properties must be sold if they are to scale back the commercial portfolio. She has asked Keene and Bright to recommend which property to sell. Such a move would change the proportions of the portfolio (see Exhibit 3).

4) Assume that they intend to sell one of the four major properties. Which should they sell?

5) Estimate the risk and return of that rebalanced portfolio.

Suppose you could sell off equity portions of properties rather than being constrained to sell the whole thing. In other words, you are not constrained to a few points in risk-return space.

6) Does this improve the risk-return profile of the commercial portfolio? What mixes dominate the frontier if equity holdings are allowed to vary (all positive, of course!).

Suppose rebalancing is done only by selling, in other words, you may change the mix only by decreasing equity holding, rather than increasing it.

7) What are the dollar values of the frontier portfolios calculated in question 6?

8) Are any of these portfolios appropriate choices in the context of the recommended overall property mix across commercial, residential and farm? Does this suggest potential for conflict between Altschuller and Whitney? Why or why not?

Exhibit 1: Composition of Taurus Commercial Portfolio

Appraised Value Property Components

$600 million San Francisco Center Office, Retail, Hotel

$1.5 billion Atlanta Convention Center Office, Retail, Hotel

$450 million Boston Fan Pier City Hotels, Apartments, Retail, Office

$450 million Denver Towers Office, Retail


Exhibit 2: Estimated Risk and Return to Properties

    Arithmetic mean   std     correlation matrix

San Francisco   15%   10%     1

Atlanta         16%   12%    .57   1

Boston          20%   15%    .39  .33      1

Denver          18%   18%   -.05 -.03    .01     1

                             SF   ATL    BOS    DEN  


Exhibit 3: Proportions of Portfolio Invested in Each Component

When a Single Property is Sold Off.

Prop.  Current    Rebalanced Proportions

       Percent  -SF   -ATL    -BOS   -DEN

SF      20%     ----   40%     59%    59%

ATL     50%     62%    ----    23%    23%

BOS     15%     19%    30%    ----    23%

DEN     15%     19%    30%     18%   ----