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CFA Level I · CFA Level I Exam · Alternative Investment Performance and Returns

A pension fund compares the reported returns of a private real estate fund that relies on periodic appraisals with those of a listed REIT index. Relative to the listed index, the appraisal-based returns are most likely to show:

Appraisal-based returns most likely show lower reported volatility and lower correlation with equities. Appraisals lag and smooth market values, so they understate true risk and diversification-reducing co-movement compared with continuously traded listed vehicles.

  1. ALower reported volatility and lower correlation with equitiesCorrect
  2. BHigher reported volatility and higher correlation with equities
  3. CHigher reported volatility and lower correlation with bonds

Explanation

Appraisals are smoothed and lag market prices, so reported returns show artificially low standard deviation and understated correlation with other asset classes. Listed prices adjust immediately, so they show higher volatility and correlation.

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