Financial Risk Manager Part 2
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As an investor deeply analyzing a hedge fund that focuses on illiquid assets, you have obtained monthly return data from this fund. Given the nature of illiquid assets, you are concerned that the return data may be distorted, potentially misrepresenting the true risk profile of the fund. What would be an appropriate measure or evaluation method for the investor to use in order to obtain an accurate assessment of the fund's risk characteristics?
A
Volatility will be artificially high, giving the appearance of high total risk, which can be corrected by taking into account the resulting positive autocorrelation of returns.
B
Correlations with other asset classes will be artificially high, giving the appearance of high systematic risk, which can be corrected using enlarged regressions with additional lags of the market factors and summing the coefficients across lags.
C
Volatility will be artificially low, giving the appearance of low total risk, which can be corrected by taking into account the resulting negative autocorrelation of returns.
D
Correlations with other asset classes will be artificially low, giving the appearance of low systematic risk, which can be corrected using enlarged regressions with additional lags of the market factors and summing the coefficients across lags.