The estimated beta measures actually the sensitivity of the returns of an investment to movements in market returns. The systematic risk of an investment is measured by the estimated “beta” (b) of the above equation. This would suggest good management of the investment. If the alpha is a positive number it means that the return achieved is higher than the return that it should achieve based on its systematic risk. This is generally interpreted by investors as an indication of bad management of their investment. Therefore, if the alpha is a negative number it means that the return achieved is lower than the return that it should achieve based on its systematic risk. The estimated alpha is the difference between the realized return of the investment from the return that it should achieve given its systematic risk. The a of the estimated equation is the widely known “alpha” of the CAPM model while b is the widely known “beta”. Structuring a Low-Risk and High-Return Portfolio Risk-Adjusted Return Estimation in Eight Steps Seven Ways to Reduce Property Investment Risk R m(t) : return for all property types (market return) at time t R i(t) : return for the particular property type under consideration at time t The estimated statistical equation can be written as follows: The latter is referred to in the CAPM model as “market return”. With these data at hand we can then estimate a regression in which the dependent variable is the return on investments in the particular property type and the independent variable is the average (value-weighted) return for all property types. Historical investment returns for the particular property type considered.In the USA, such investment return data can be obtained from the National Council of Real Estate Investment Fiduciaries (NCREIF) and include all major property types (apartments, office, retail, industrial and hotels) Historical investment returns for the whole property market that includes all property types that attract significant investment interest in that market.The two historical series of data required are the following: If you would like to discuss any questions you may have regarding this article or how to use a particular set of data to calculate the Alpha and the Beta, click on the button below to schedule an online tutorial/consulting session with Dr. The minimum requirement of 20 years is also advisable for the robustness of the econometric results. At minimum, the data should cover twenty years of historical behaviour so at least a full cycle is included. The capital asset pricing model (CAPM) can be used in real estate investment analysis to calculate risk measures by property type. In order to apply the CAPM to real estate we need at least two series of historical data that span as long as possible.
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