CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
An appraisal-based real estate index is compared with a REIT index over the same period. The appraisal-based index most likely shows:
An appraisal-based index most likely shows lower reported volatility and understated risk. Appraisals use lagged transaction data and smooth value changes, so measured standard deviation and correlation with other assets are biased downward compared with market-priced REIT returns.
- AHigher reported volatility and higher correlation with equities
- BLower reported volatility and understated riskCorrect
- CThe same volatility but a delayed return pattern
Explanation
Appraisals rely on lagged comparable sales data, which smooths reported returns. This lowers measured standard deviation and correlations, so risk is understated. The first option describes market-priced REITs instead.
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