When evaluating the risk associated with hedge funds that invest in illiquid assets using monthly data, one must be aware of certain biases that may arise and skew the perceived risk profile. Specifically, such hedge funds might appear to exhibit minimal systematic risk due to these biases. What is an appropriate technique to mitigate this problem?

Exam-Like

Account for negative serial correlation of returns by first differencing the data when extrapolating risk to longer time horizons.

9.4%

Account for positive serial correlation of returns by aggregating the data.

12.5%

Use regressions with fewer lags of the market factors and sum the coefficients across lags.

12.5%

Use regressions with additional lags of the market factors and sum the coefficients across lags.

65.6%

Financial Risk Manager Part 2