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.
- is incorrect. Smoothed Relative TO RE understas vol and correlation ‘Unsmoothing’ should fix asynchronous bias
sorry, last clarification: NACREIF index, to begin with is Smoothed… and that means infrequent/stale pricing? everything else I understand…
So your basically telling me…Unsmoothed is perfect…no problems, no issues.
cfacfacfa Wrote: ------------------------------------------------------- > So your basically telling me…Unsmoothed is > perfect…no problems, no issues. plenty of problems. Unsmoothed is just ‘statistically’ better then smoothed given the infrequency of data pricing, that is it.
3rd & Long Wrote: ------------------------------------------------------- > sorry, last clarification: > > > NACREIF index, to begin with is Smoothed… and > that means infrequent/stale pricing? > > everything else I understand… NCREIF itself is infrequent - - tracks property sales specifically - - values are obtained periodically - - that is in contrast to NAREIT which is a reit index and reits trade every day so NCREIF (whether smoothed or unsmoothed) is based on infrequent data - - and therefore the volatility is downward biased (would agree with CSK and BW that smoothed statistically should be even less vol but i don’t think the material actually gets into that) maybe that’s where i’m hung up - - maybe the question wasn’t referring to unsmoothed vs smoothed - - just NCREIF in general (and the question referred to it as unsmoothed - so i was thinking - okay, vs unsmoothed) still can’t say that i fully understand why NCREIF vol is downward biased due to infrequent measurements - - would think less data points = higher vol but maybe point is that you miss a lot of the peaks and valleys that you might see with reits based on daily trading
3rd & Long Wrote: ------------------------------------------------------- > sorry, last clarification: > > > NACREIF index, to begin with is Smoothed… and > that means infrequent/stale pricing? > > everything else I understand… Think of it as NACREIF and de-smoothed NACREIF. The NACREIF index as reported is inherently smooth because it relies on appraisals instead of actual transaction prices. Appraisers tend to lag the price a property would trade at in the market because they use comparables that may not reflect current market conditions. Also NACREIF is only reported on a quarterly basis so it doesn’t pick up “intra-quarter” volatility in prices. De-smoothing the NACREIF index entails some sort of econometric model that injects volatility into the reported index, but it’s just a modeled construct. I think the main point is that using NACREIF as reported to analyse diversification benefit in a portfolio likely overestimates this benefit because the index itself doesn’t fully capture volatility and correlation between asset classes for the reasons described above.
good post jbaldyga - - that makes sense