Characteristics of Long-Run Return and Risk: A Unified Performance Metric

32 Pages Posted: 25 May 2016 Last revised: 2 Nov 2017

See all articles by Ping Cheng

Ping Cheng

Florida Atlantic University - Finance

Zhenguo (Len) Lin

Florida International University (FIU) - Hollo School of Real Estate

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas

Date Written: May 25, 2016

Abstract

It is well documented in the literature that long-run asset prices do not follow the random walk, and their returns are not independent and identically-distributed (i.i.d.) over time. But how can this notion – long-run returns and volatilities being horizon dependent - be incorporated into formal pricing models? This paper proposes a unified risk-adjusted return metric that is applicable to both private assets and public securities. Since such metric is based on a pair of empirically determined return and risk characteristic lines that depict the horizon impact on return and volatility, the resulted performance metric is rooted in empirical evidence rather than theoretical assumptions. Empirical results suggest that long-run asset performance cannot be adequately measured by single-period return and volatility. Rather, prudent long-run investment decision must give careful consideration of the anticipated holding period and proper understanding of the long-run return and risk characteristics.

Keywords: investment performance metric, real estate, financial assets

JEL Classification: R51, G12

Suggested Citation

Cheng, Ping and Lin, Zhenguo and Liu, Yingchun, Characteristics of Long-Run Return and Risk: A Unified Performance Metric (May 25, 2016). Journal of Real Estate Research, 2017, Vol. 39 (2), 165-187., Available at SSRN: https://ssrn.com/abstract=2784229

Ping Cheng

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
561-297-3456 (Phone)
561-297-3686 (Fax)

Zhenguo Lin (Contact Author)

Florida International University (FIU) - Hollo School of Real Estate ( email )

Miami, FL 33199
United States
3057799248 (Phone)

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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