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Answer: Survivorship bias and reporting bias can theoretically be eliminated by including the returns of the entire population of funds.
The correct statement for the manager to include in the report is option C: "Survivorship and reporting biases can be theoretically eliminated by including the entire population of funds." This statement is accurate because it acknowledges that both survivorship bias and reporting bias can skew the reported returns of illiquid assets. Survivorship bias occurs when only the returns of funds that continue to operate are reported, while reporting bias happens when only funds with sufficiently attractive returns are reported. By considering the entire population of funds, including those that have ceased operations or have less attractive returns, these biases can be mitigated, leading to a more accurate representation of the actual performance of illiquid assets. Options A and B are incorrect as they misrepresent the nature of the biases. Survivorship bias does not overstate reported returns; instead, it can lead to an underestimation of risk and an overestimation of performance by excluding the returns of funds that have failed. Reporting bias, on the other hand, does not necessarily overstate returns but rather can create a skewed view by only including funds with certain return thresholds. Option D is also incorrect because infrequent trading or sampling can lead to biases that result in underestimated beta, correlation, and volatility estimates. This is because less frequent data points can miss out on capturing the full range of asset price movements and market dynamics, leading to less accurate measures of risk and performance.
Author: LeetQuiz Editorial Team
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The Chief Investment Officer (CIO) of a large university endowment fund is considering the addition of several non-liquid assets to the university's investment portfolio to potentially boost its overall performance. To better understand the implications of this move, the CIO has tasked an investment manager with producing a comprehensive report on the characteristics of returns generated by illiquid assets. The investment manager has subsequently conducted an analysis of the behavior of these illiquid assets, focusing on the various factors that impact their returns.
A
Survivorship bias overstates reported returns of liquid assets by reporting only the returns of those funds that have achieved a return above a required threshold.
B
Reporting bias overstates reported returns of illiquid assets because only the returns of those funds that continue to remain in business over a given time period are considered.
C
Survivorship bias and reporting bias can theoretically be eliminated by including the returns of the entire population of funds.
D
Infrequent trading, although considered a bias, can still generate sufficient data for accurate beta and correlation estimates.