Reference no: EM132371655

The board trustees of Elite Corporation's US$50 million pension fund are meeting to discuss a presentation they recently received from their pension consultant, who is recommending that they diversify their current 50/50 stock/bond asset allocation to include a 10 percent allocation to real estate. Although the trustees would like to reduce portfolio risk without sacrificing a significant amount of return, the trustees have previously been reluctant to change the asset allocation because they are concerned about ''making a mistake we can't easily fix'' if the economic environment changes. One trustee, Maya Semyonova, makes reference to the table above and some notes that provide an overview of how the various indices are constructed. Semyonova states:

''To address our stated risk and return objectives and given the superior historical benefits of direct investing in real estate, represented by the unsmoothed NCREIF Index, I recommend that we reallocate 10 percent from our bond investments indexed to the Lehman Aggregate to a direct real estate asset.''

A second trustee, John Pearson, responds with a different recommendation: ''I believe we should reallocate 10 percent from the 50 percent S&P 500 allocation to REITs to achieve our goals.''

A. Critique Semyonova's recommendation with reference to the return, risk, diversification, and liquidity characteristics of the two asset classes to which Semyonova is referring.

B. Critique Pearson's recommendation with reference to the return, risk, diversification, and liquidity characteristics of the two asset classes that Pearson is referring to.

C. Of the reallocation scenarios suggested by Semyonova and Pearson, choose the one most appropriate for Elite Corporation's pension fund based on the trustees' objectives. Justify your choice with reference to returns, risks, and issues concerning construction of real estate and REIT indices.