Glossary

Standard Deviation of Returns (Volatility)

Also known as: Volatility, Return Volatility

A statistical measure of the dispersion of a portfolio's or asset's periodic returns around its mean, used as the standard proxy for total risk in real estate portfolio analysis and as the risk denominator in the Sharpe ratio.

Standard deviation calculated directly from quarterly appraisal-based index data (such as returns from a diversified core fund benchmark) is conventionally annualized by multiplying the quarterly figure by the square root of four, a convention that assumes returns are independently distributed from one quarter to the next. Appraisal smoothing violates that assumption by introducing serial correlation into the return series — each quarter's appraisal partially anchors to the prior quarter's value — which means naively annualized private real estate volatility figures are systematically understated relative to the asset class's true underlying economic volatility, a distortion analysts correct for using statistical unsmoothing before relying on the figure for cross-asset-class risk comparisons or portfolio optimization.