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Answer: Survivorship bias and reporting bias can theoretically be eliminated by including the returns of the entire population of funds.
C is correct. Survivorship and reporting biases can be theoretically eliminated by including the entire population of funds. A is incorrect. Reporting bias enhances illiquid asset reported returns by reporting the returns only of those funds which have achieved a sufficiently attractive return. B is incorrect. Survivorship bias enhances illiquid asset reported returns by reporting the returns only of those funds that continue to remain in business over a set period. D is incorrect. Infrequent trading/sampling although considered a bias will provide estimations for beta, correlation and volatility which are too low.
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The chief investment officer (CIO) of a large university endowment fund is considering adding some illiquid assets to improve the performance of the university's investment portfolio. The CIO asks an investment manager to prepare a report discussing the characteristics of illiquid asset returns. The manager reviews the dynamics of illiquid assets and the determinants of their returns. Which of the following is a correct statement for the manager to include in the report?
A
Survivorship bias overstates reported returns of illiquid 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.
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