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 partic ...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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