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Downside Risk - application to REITs and equities - Essay Example

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Downside Risk - application to REITs and equities

The analysis includes independent variables drawn from a database and includes variables to adjust results for the impact of macroeconomic factors. In addition, indexes for the broader markets are identified and included in the regressions to adjust for the impact of trends in the general market.
Investment in Listed Property Trusts (LPTs) or Real Estate Investment Trusts (REITs) has often considered risk as an important factor and that has been a traditional way of thinking for a considerably long time. Numerous studies on risk have also demonstrated that REIT's financial condition and management structure have serious implications for its risk. Most of these studies, as we will learn more in the forth coming sections, have utilised the cross-sectional difference of REIT financial conditions and REIT management structure in estimating the relationship between these variables and risk. A REIT's risk is measured by the beta coefficient in the Capital Asset Pricing Model (CAPM) in which it is measured in a variance framework. Appendix A has several terms defined which will be time and again repeated in this study.
However, it has been observed that the appropriateness of using CAPM and in particular the use of beta as risk measure has been debated in recent years. In fact, several studies suggest downside systematic risk (downside beta) is comparatively better than systematic risk for measuring market-related risk for an asset in line with the theoretical superiorities of downside risk. Downside risk was first introduced by Roy (1952) primarily based on the safety first rule. It appears as a more interesting and fairly appealing and secure risk measure compared to variance for several reasons such as downside risk does not require an assumption about the return distribution of an asset; it is more consistent with the investor's expected utility function and also the combining information provided by variance and skewness into one measure (Nawrocki, 1999, Estrada, ...Show more

Summary

It is fairly well propagated concept from Economists for a significantly long time that investors care differently about downside losses versus upside gains. All stakeholders that place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements…
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Downside Risk - application to REITs and equities essay example
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