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Answer: Use regressions with additional lags of the market factors and sum the coefficients across lags.
The correct answer is D. Artificially low asset class correlations leading to the appearance of low systematic risk is a bias faced by hedge funds with illiquid holdings that use monthly valuation data. One way to correct for this is to use enlarged regressions with additional lags of the market factors and to sum the coefficients across lags. This approach helps to better capture the underlying relationships and dynamics between the hedge fund's returns and the market factors, providing a more accurate assessment of the fund's systematic risk over longer time horizons.
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Hedge funds can sometimes present a misleading image by appearing to have a low level of systematic risk. What would be an appropriate method from the options provided to correct this perception?
A
Account for negative serial correlation of returns by first differencing the data when extrapolating risk to longer time horizons.
B
Account for positive serial correlation of returns by aggregating the data.
C
Use regressions with fewer lags of the market factors and sum the coefficients across lags.
D
Use regressions with additional lags of the market factors and sum the coefficients across lags.
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