___ ___exists when real estate transaction prices contain errors, rendering the prices less reliable.

**Transaction noise **exists when real estate transaction prices contain errors, rendering the prices less reliable.

The two primary approaches to real estate indexation are ___-based and ___-based techniques.

The two primary approaches to real estate indexation are **appraisal**-based and **transaction**-based techniques.

Reported asset prices may have a delayed reaction to changes in economic conditions, which results in a ___ ___.

Reported asset prices may have a delayed reaction to changes in economic conditions, which results in a **smoothed** **series**.

The unsmoothing process removes the effects of smoothing by reducing the level of ___ in the data.

The unsmoothing process removes the effects of smoothing by reducing the level of **autocorrelation **in the data.

A smoothed return series has lower ___ ___, lower ___and lower ___.

A smoothed return series has lower **standard deviations**, lower **correlations **and lower **betas**.

In perfect markets with low or no transaction costs, ___ can unsmooth prices.

In perfect markets with low or no transaction costs, **arbitrageurs **can unsmooth prices.

Two key impediments prevent arbitrageurs from unsmoothing a smoothed return series:

1. No real ___ ___

2. ___ ___and other ___

Two key impediments prevent arbitrageurs from unsmoothing a smoothed return series:

1. No real **trading opportunities**

2. **Transaction costs **and other **barriers**

Key consequences for understating volatility of assets with smoothed prices are inflated ___ ___ and ___ to the assets by standard portfolio optimization models.

Key consequences for understating volatility of assets with smoothed prices are inflated **Sharpe ratios **and **overallocation **to the assets by standard portfolio optimization models.

Smoothing model equation in terms of beta

Smoothing model equation in terms of alpha (rate of decay)

A ___ α indicates that the current reported price is driven more by the current true price than by true prices in previous time periods.

A **larger **α indicates that the current reported price is driven more by the current true price than by true prices in previous time periods.

Fisher estimates α to be ___ for private, unleveraged annual real estate returns.

Fisher estimates α to be **0.4 **for private, unleveraged annual real estate returns.

What is the true price in terms of first-order autocorrelation. (equation)

There are 4 key reasons for first-order autocorrelation

1. A price index is based on ___ ___and ___ ___.

2. ___may generate smoothed prices and exhibit ___

3. Even efficient markets may signal ___ ___responses

4. There is often a ___ ___between setting the price and reporting the transaction.

There are 4 key reasons for first-order autocorrelation

1. A price index is based on **recent transactions **and **stale components**.

2. **Appraisers **may generate smoothed prices and exhibit **anchoring**

3. Even efficient markets may signal **lagged price **responses

4. There is often a **time delay **between setting the price and reporting the transaction.

What is the correlation coefficient between 2 variables?

What is the true variance of smoothed returns (equation)

What is the Beta of true returns (equation)

___ ___ ___or ___occurs because real estate market transactions involve negotiations between parties and the final transaction price is one of value from a range of prices that could have resulted from the negotiations.

**Purely random error **or **noise** occurs because real estate market transactions involve negotiations between parties and the final transaction price is one of value from a range of prices that could have resulted from the negotiations.

___ ___ ___occurs when transaction prices are related to historical prices because of the structure of the real estate market.

**Temporal lag bias **occurs when transaction prices are related to historical prices because of the structure of the real estate market.

Noisy pricing can be explained by the fact that the transaction price is selected from a range of ___ ___.

Noisy pricing can be explained by the fact that the transaction price is selected from a range of **reservation** **prices**.

The difference between an observed price and the unobservable true market value is referred to as ___ ___ ___or ___ ___ ___.

The difference between an observed price and the unobservable true market value is referred to as **transaction price noise **or **transaction price error**.

The difference between an appraised value and the unobservable true market value is referred to as ___ ___.

The difference between an appraised value and the unobservable true market value is referred to as **appraisal** **error**.

The random appraisal estimation error can be reduced by using more ___ ___. However, using data from earlier periods increases ___ ___. Similarly, reducing ___ ___increases the ___. This ___-___trade-off has a ___form: it ___but at a ___rate.

The random appraisal estimation error can be reduced by using more **transaction data**. However, using data from earlier periods increases **temporal** **lag**. Similarly, reducing **temporal lag **increases the **noise**. This **noise**-**lag** trade-off has a **concave **form: it **increases **but at a **decreasing **rate.

The accuracy of an estimated appraisal is ___ proportional to the ___ ___of the number of transactions

The accuracy of an estimated appraisal is **inversely **proportional to the **square root **of the number of transactions

There are 3 primary approaches to appraising real estate:

1. ___ ___ approach

2. ___ approach

3. ___ approach

There are 3 primary approaches to appraising real estate:

1. **Sales comparison **approach

2. **Cost **approach

3. **Income **approach

The ___ appraisal approach estimates a property's value by adding the depreciated value of any improvements to the land value.

The **cost **appraisal approach estimates a property's value by adding the depreciated value of any improvements to the land value.

The ___ appraisal approach is a discounted cash flow approach that values a property by discounting the property's projected net operating income by an appropriate discount rate.

The **income **appraisal approach is a discounted cash flow approach that values a property by discounting the property's projected net operating income by an appropriate discount rate.

There are 2 primary advantages of appraisal-based models:

1. They do not suffer from a ___ ___ ___bias

2. All properties can be ___ ___.

There are 2 primary advantages of appraisal-based models:

1. They do not suffer from a **small sample size **bias

2. All properties can be **appraised** **frequently**.

There are three disadvantages to appraisal-based models:

1. Appraisals are ___ and ___-___.

2. Values of appraisal-based indices are ___

3. Appraisal techniques depend on ___of ___ ___

There are three disadvantages to appraisal-based models:

1. Appraisals are **subjective** and **backward**-**looking**.

2. Values of appraisal-based indices are **smoothed**

3. Appraisal techniques depend on **availability **of **quality data**

The change in value of each property in the NPI is calculated on an "___ ___" basis. If a property was bought or sold during the quarter, its ___ ___is used.

The change in value of each property in the NPI is calculated on an "**as if**" basis. If a property was bought or sold during the quarter, its **transaction** **price **is used.