CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
Which of the following real estate indexes is most likely to suffer from smoothing, so that its reported volatility understates the true volatility of property returns?
An appraisal-based index is most likely to be smoothed. Appraisers anchor on earlier valuations and lagging comparable sales, which dampens changes in reported values. The result is understated volatility and understated correlation with other asset classes. Transaction-based and REIT indexes use observed market prices.
- AAn appraisal-based indexCorrect
- BA transaction-based index
- CA listed REIT total return index
Explanation
Appraisal-based indexes rely on valuers who anchor on prior values and comparable sales that lag the market. This smooths the series and lowers measured volatility and correlation with other assets. Transaction-based and REIT indexes use actual prices, so they are not smoothed in this way.
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