Key Takeaways
- Use complete cycles for return calculations — never measure from troughs or to peaks.
- Actively seek failure data to counteract survivorship bias in your analysis.
- Stress-test projections against historical worst cases: 25% price decline, doubled vacancy, 300bp rate increase.
- If your portfolio cannot survive historically-grounded stress scenarios, reduce leverage or increase reserves.
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Test Your Knowledge
1.What is the correct way to calculate historical returns?
2.What three stress scenarios should every financial projection be tested against?
3.What should you do if your portfolio cannot survive these stress scenarios?