Explanation:
B is correct. Expected returns of illiquid assets can be overstated due to measurement biases such as infrequent trading, survivorship, and reporting biases.
A is incorrect. Corporate bonds that trade less frequently or have larger bid-ask spreads actually have higher returns, not lower returns, to compensate investors for the additional liquidity risk.
C is incorrect. US Treasuries do exhibit illiquidity risk premiums between on-the-run and off-the-run bonds, with off-the-run bonds typically offering higher yields to compensate for their lower liquidity.
D is incorrect. Hedge funds which do place restrictions on investor withdrawals have shown higher returns, not those without restrictions. The restrictions help fund managers manage liquidity and pursue less liquid investment strategies that may generate higher returns.
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The chief investment officer (CIO) of a large university endowment fund is considering whether to add illiquid assets to the university's investment portfolio. Before making a decision, the CIO asks an investment analyst to review illiquidity risk premiums across and within asset categories and to prepare a report with findings. Which of the following statements is correct for the analyst to include in the report?
A
Corporate bonds that trade less frequently or have larger bid-ask spreads have lower returns than more liquid corporate bonds.
B
Expected returns of illiquid assets can be overstated due to measurement biases.
C
US Treasury instruments are the only assets that do not exhibit illiquidity risk premium.
D
Hedge funds that do not place restrictions on withdrawals exhibit higher returns.