# NACREIF

Keep forgetting… Right or Wrong… The NACREIF index (relative to NACREIF Smoothed)…will understate volatility (i.e. standard deviation)…and understate correlation. Assuming that statement is correct…would I be right or wrong in saying just the opposite… The NACREIF Smoothed index will overstate volatility (i.e. std dev)…and overstate correlation.

Smoothed Index: understates vol and stan dev. compared to the Unsmoothed

I thought the opposite…unsmoothed would understate std dev due to infrequent valuations.

Smoothed = Less Vol, think of it. If you are driving over a bumpy road (unsmoothed) there are a lot of ups and downs…but if you drive over a paved road its smooth with very little bumps, hence less ups and downs, less Volatility Therefore, NACREIF Smoothed Index = Understates Volatility.

as an example: here’s an index and the closing level… on day’s we don’t have the closing price, we take the day’s before and plug it in… because this duplicates values it will decrease the vol and decrease the stan dev… as the data is more homogenous… this is the smoothed index concept… 1/1/2008 1000 1/2/2008 1/3/2008 2000 1/4/2008 1/5/2008 3000 1/6/2008 4000 1/7/2008 5000 1/8/2008 1/9/2008 6000 1/10/2008 5000 1/11/2008 1/12/2008 6000 1/13/2008 5000

it makes sense…and I know I’ve told myself that @ 1 point or another…but after looking at this stuff for so long…parts that shouldn’t be moving…start moving. So NACREIF is the accurate index (doesn’t really understate or overstate anything)…and relative to NACREIF…NACREIF smoothed…understates volatility…and understates correlation?

yes, the Smoothed INdex understates both factors

i thought there was a question in one of the practice tests that asked the question about the unsmoothed version and why it understated vol - - i was thinking that didn’t make sense but the answer was that the data tends to be stale sorry - don’t remember the details (hate the posts where people screw me up by asking questions where they mis-state the facts - like i’m probably doing) - - in any event, does anyone remember this question - - maybe the cfai sample exam or on of the vol 2 schweser tests?

just when I thought we could put this to bed… haha…no, you raise a good point…I know what you are referring to, but I don’t remember the details…that question is what made me think of this in the 1st place.

OK , I had to check b/c I thought something was up. The SMOOTHED INDEX is the Regular NACREIF Index. There is another version called the UNSMOOTHED NACREIF Index. This increases the Volatility fo the index and makes it more realistic. I thought something was fishy with the earlier question b/c I thought the NACREIF was smooth to begin with due to stale pricing, why would smooth an already smooth index?? To make a Smoothie?

I’m still messed up here…true or false… NACREIF unsmoothed understates volatility due to infrequent valuations? …this is true…i think

not sure i’m following the jive speak BW - - but i thought the question in the practice test said something like why is the unsmoothed NACREIF volatility lower than would be expected - - and the vol or std was something like 3%. I’m thinking that makes no sense, if it’s unsmoothed, it should be volatile - - but the answer was “because the data is not smoothed, and is infrequent and therefore tends to be stale” - - it’s sticking in my head because it sounds intuitively wrong - - if i just mis-read, i’ll be pissed bc no it’s stuck in my head that unsmoothed is low vol for some reason dealing with staleness

cfacfacfa - - that’s exactly what i remember from the test - - makes no intuitive sense to me though

NACREIF unsmoothed understates volatility due to infrequent valuations? FALSE. NACREIF is smoothed by definition, when you unsmooth you scale std, so std becomes bigger as std becomes bigger correlation also increases

CSK - that makes total sense - - for some reason, think CFAI may be stating it the opposite though - - if anyone has the books, please shoot this topic in the head - - need the kill shot

Unsmoothed has higher Volatility than Smoothed index. The Unsmoothed Index is a better index to represent Direct Investment in RE. The Regular Index Understates teh Volatility due to Infrequent pricing. You have it backwards for some reason.

cvillecfa Wrote: ------------------------------------------------------- > CSK - that makes total sense - - for some reason, > think CFAI may be stating it the opposite though - > - if anyone has the books, please shoot this topic > in the head - - need the kill shot I am 100% sure i am right.

cvillecfa you are Wrong, sorry to say it but you are wrong. Trust me and CSK on this one.

you can trust me on everything except if i prefer macro attribution from the top or the bottom. That is confidential

Alright sooo…in summary… 1) Unsmoothed is the most accurate benchmark for Direct Real Estate 2) Smoothed RELATIVE TO UNSMOOTHED understates volatility and correlation 3) Unsmoothed RELATIVE TO REAL ESTATE itself understates volatility and correlation due to infrequent valuations.