You believe that the addition of other asset classes to the endowment portfolio would improve the portfolio by reducing risk and enhancing return. You are aware that depressed conditions in Kenyan real estate markets are providing opportunities for property acquisition at levels of expected return that are unusually high by historical standards. You believe that an investment in Kenyan real estate would be both appropriate and timely, and have decided to recommend a 20 percent position be established with funds taken equally from stocks and bonds.

Preliminary discussions revealed that several trustees believe real estate is too risky to include in the portfolio. The board chairman, however, has scheduled a special meeting for further discussion of the matter and has asked you to provide background information that will clarify the risk issue. To assist you, the following projected data have been developed:

			Correlation Matrix
Asset Class	Return	Deviation	Stocks	Bonds	Real Estate	T-Bills
Stocks	12.0%	21.0%	1.00
Bonds	8.0	10.5	0.14	1.00
Real Estate	12.0	9.0	0.04	0.03	1.00
Treasury Bills	4.0	0.0	0.05	0.03	0.25	1.00

Required:

Explain the effect on both portfolio risk and return that would result from the addition of real estate. Include in your answer two reasons for any change you expect in portfolio risk. (Note: It is not necessary to compute expected risk and return.)