Risk Profiles of REITs in Economic Cycles

Very Hard Real Estate Investment Reits

ABC Investments is analyzing the performance of several Real Estate Investment Trusts (REITs) within its diversified investment portfolio. The management team is particularly interested in understanding how different types of REITs respond to macroeconomic factors, specifically interest rates and economic growth. They are evaluating three specific REITs that focus on different real estate sectors: residential, commercial, and healthcare.

During their analysis, ABC Investments discovers that the healthcare REIT has consistently outperformed both the residential and commercial REITs during periods of economic downturn. However, they note that the healthcare REIT carries a higher level of debt relative to its equity compared to the other two REITs.

Given these observations, ABC Investments is curious to learn about the relative risk-adjusted returns of these REITs due to changes in interest rates and the potential impact of economic cycles. Which of the following statements is most accurate regarding the risk profile and expected return characteristics of these three REITs?

The healthcare REIT is likely to exhibit greater volatility in returns compared to the commercial REIT due to its higher leverage and sector-specific risks.

The residential REIT is expected to provide better risk-adjusted returns during economic expansions due to its ability to capitalize on rising rents.

The commercial REIT is more sensitive to interest rate fluctuations compared to the residential REIT because commercial properties typically have longer lease agreements.

Hint

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