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Technical Notes: Delving into Portfolio and Asset Level Interchanges for Risk Optimization

Updated: Aug 6, 2023

In previous posts we highlighted the complex world of real estate asset management, and a capability to manage that complexity for value driven NOI. Important to that concept is understanding the intricate interplay between portfolio and asset level operations is crucial. This edition of Technical Notes explores this interaction, focusing on risk optimization using derivatives of portfolio theory and marginal contribution. We also examine the potential application of martingale theory in this context.

Portfolio and Asset Level Interchanges

The interaction between portfolio and asset level operations forms the backbone of effective real estate asset management. At the portfolio level, strategic decisions are made based on aggregate financial data, risk assessments, and market trends. At the asset level, tactical decisions are informed by real-time data from individual properties, enabled by technologies such as MBSE, BIM, and IoT.

Risk Optimization: Portfolio Theory and Marginal Contribution

Risk optimization in this context can be informed by portfolio theory, which suggests that diversification can reduce risk without compromising expected returns. Each asset's marginal contribution to overall portfolio risk can be calculated, and assets can be added or removed from the portfolio to optimize the risk-return trade-off. The critical piece is how each relative portfolio asset and portfolio level help posit valuable insight to your value drivers.

The Application of Martingale

Martingale theory, a mathematical model originally developed for fair games, has found applications in various fields, including finance. In the context of real estate asset management, it could potentially be applied to model the stochastic processes underlying property values and rental incomes. However, the application of martingale theory in this context is complex and requires careful consideration of the assumptions and limitations of the model. However, do reach out so we can discuss how more mature portfolios can reap its benefits!

Lets Find the Value Together

The interplay between portfolio and asset level operations is a complex system that requires sophisticated tools and methodologies for effective management. By leveraging portfolio theory, marginal contribution, and potentially martingale theory, real estate asset managers can optimize risk and drive value creation.

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