Reading 23: Capital Market Expectations－LOS b

The use of appraisal data, relative to actual returns, results in correlations that are biased downwards and standard deviations that are biased downwards. The reason is that price fluctuations are masked by the use of appraised data.

Survivorship bias can result when a return series is based on a stock index. It will be biased upwards if the return calculation does not include firms that have been dropped from the index due to delistings.

Her desire to use statistics would most likely result in asynchronous data and downward biased correlations. Some researchers use more frequent data (e.g., using daily instead of monthly returns) in order to increase the length of the data. This however, increases the likelihood of asynchronous data. Asynchronous data results when, for example, the return for a real estate asset is not available on a given day. The researcher then replaces it with the previous days return. When measured against equity returns with readily available daily data, the real estate asset standard deviation and correlation with equity is artificially low.