Use of Apprisal Data should, assets, someone

cfalevel2011

When you use apprisal data, the correlation to other assets class are biased downwards compared to the true correlation, also the true variance of the asset is bisased downwards.

can someone explain why the true variance is biased downwards?

I thought the true variance should be biased upwards since apprisal data somewhat smoothes out the volalility.

Windjam

haha, this is getting hillarious

Valores

I do mean the correlation between 1 and 2...

biased downwards from their "real leve" or "actual level"

lcw77

whystudy Wrote:
-------------------------------------------------------
> When you use apprisal data, the correlation to
> other assets class are biased downwards compared
> to the true correlation, also the true variance of
> the asset is bisased downwards.
>
> can someone explain why the true variance is
> biased downwards?
>
> I thought the true variance should be biased
> upwards since apprisal data somewhat smoothes out
> the volalility.


"true variance.. is BIASED downwards" - this is how I read the statement.






EDIT:

By reading this statement, I interpret it as follows:

Someone smooths out the returns... puts a bias on the actual picture.. we only see how the price is nicely trending up.. so the true variance is biased.. how, you might ask? well, downward.. it was supposed to be way higher than the picture shows..


I think you are misinterpreting what you are reading...



Edited 1 time(s). Last edit at Tuesday, June 1, 2010 at 09:26PM by kurmanal.

Unforseen

I don't know if this helps...but take a look at this...

asset 1 (mvs' are smoothed intra-quarter and refreshed at end of year)
quarter 1 - 100
quarter 2 - 100
quarter 3 - 100
quarter 4 (end of year) - 90

asset 2 (mv's are refreshed quarterly)
quarter 1 - 100
quarter 2 - 85
quarter 3 - 105
quarter 4 (end of year) - 90

if you compare asset 1 and asset 2, their correlations will be biased downwards due to smoothing, even though they both end up at the same mv at end of the year.

and asset 1 will have low variance and standard deviation than asset 2 due to smoothing....

this is how I keep is straight in my mind.

mcmc

to me, variance is easy to get, but correlation is pretty hard to understand. I thought

appraisal smooth >> higher Rsquared >> higher correlation. when data is smoothed, it is more likely develop dependent relationship with others; if volatile, highly possible the Rsquared will be low, hence lower correlation.

did I miss anything?

Analyze_This

mp2438 Wrote:
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> think of the formula (the diversification effect)
> - Variance = (..... +
> 2*w1*w2*stddev1*stddev2*correlation coefficient).
> Since correlation coefficient is lowered, so is
> the variance.


variance of the asset class to itself not with a another asset. that's what it's stating.

Zestt

think of the formula (the diversification effect) - Variance = (..... + 2*w1*w2*stddev1*stddev2*correlation coefficient). Since correlation coefficient is lowered, so is the variance.

jmh530

kurmanal Wrote:
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> Since the appraisals are done infrequently, you
> will have infrequent price changes. This means you
> will not "see" any movements between appraisal
> dates. Since you only see "the smoothed"
> increase/decrease in price, your computed standard
> deviation will be lower compared to highly liquid
> assets


exactly, but the CFA states that the TRUE variance (starndard deviation) will actually be the lower one having a downward bias.

read the statement above.

ll11

ok you are right..but again the if you cannot truly observe the asset value because the same is not readily tradeable, the measured values as reported by appraisals will not exhibit the variance due to infrequent measurement of appraisals.