# Singer-Terhaar Approach

With Singer-Terhaar Approach, we need to add the illiquidity premium (if shown) in the fully segmented risk premium, but do we also need to add the illiquidity premium in the fully integrated risk premium?

A fully intergrated market should not suffer from illiquidity. Unless it was specifically mentioned in the question.

From my understanding, one needs to add the liquidity premium in both the fully segmented and the fully integrated.

See for example example 19 of reading 15 of Us real estate:

Fully integrated:

RPUS RE = (11.5% × 0.50 × 0.28) + 0.30% = 1.61% + 0.30% = 1.91%

Fully segmented:

RPUS RE = (11.5% × 0.28) + 0.30% = 3.22% + 0.30% = 3.52%

Note that we added an illiquidity premium of 0.3 percent to the ICAPM derived premium estimates for real estate

I thought the weightings were applied to the segregated and intergrated values…and THEN a single liquidity premium was added to the final figure (if given)

Many thanks

Thats what i do for PM type exam question as it gives the same result with less calculation

Assuming a degree of integration of w=0.7

integrated:

RPUS RE = (11.5% × 0.50 × 0.28) + 0.30% = 1.61% + 0.30% = 1.91%

Segmented:

RPUS RE = (11.5% × 0.28) + 0.30% = 3.22% + 0.30% = 3.52%

Overall:

=>RPUS RE = (0.7 × 1.91%) + (0.3 × 3.52%) = 2.39%

=>E(RUS RE) = 3% (risk free) + 2.39% = 5.39%

Equivalent to:

integrated:

RPUS RE = (11.5% × 0.50 × 0.28) + 0.30% = 1.61%

Segmented:

RPUS RE = (11.5% × 0.28) + 0.30% = 3.22%

Overall:

=>RPUS RE = (0.7 × 1.61%) + (0.3 × 3.22%) = 2.09%

=>E(RUS RE) = 3% (risk free) + 2.09% +0.30%(illiquidity premium)= 5.39%

For the AM exam, i would stick to how they present it in the curriculum to be sure to get the points