Question

As we know that portfolio risk calculation includes the variances of real estate returns and correlation between real estate returns and returns of other assets. Thus it is clear that expected returns will not affect portfolio risk but Standard deviation and correlation with the returns of other assets will affect it. Correlation between real estate returns and returns for cash is zero.

​Explain that how is correlation between real state returns and returns for cash is zero?

Answer 1

Correlation tries to find out the relative movement of the assets. Generally to have establish relationship between any of the assets, decade old data is analyzed and then corelation is found out.

Here,

Real estate returns moves in upward/downward direction, but cash which stays same will not move upward/downward.

If we talk about the real returns (nominal returns - inflation) then also by analyzing past data there is no strong relationship between real estate returns and cash. Example for this you can look into after 2000 data where real estate prices moved up very fast and then dropped after 2008. So stastically relationship between real estate and cash is not there so its zero.