Answer-first summary for fast verification
Answer: Turnover bias decreases the typical time between transactions and tends to artificially increase the expected return by 5.0% or more
## Explanation According to Andrew Ang's analysis of illiquid asset biases: - **Survivorship bias (Option A)**: This is a valid bias where only successful funds/strategies continue to exist and report returns, while failed ones drop out of databases. This can indeed inflate reported returns by 4.0% or more. - **Infrequent sampling bias (Option B)**: This is also a valid bias where infrequent trading and pricing of illiquid assets leads to artificially smooth returns, reducing measured volatility, correlation, and beta estimates. - **Selection bias (Option D)**: This is a valid bias where funds voluntarily report only their good performance, leading to overestimation of alpha and underestimation of beta. - **Turnover bias (Option C)**: This is NOT accurate. Turnover bias actually refers to the opposite phenomenon - it tends to artificially **decrease** expected returns, not increase them. When assets are held for longer periods without transactions, the reported returns can appear smoother and potentially understated, not overstated. The statement that turnover bias "decreases the typical time between transactions and tends to artificially increase the expected return by 5.0% or more" is incorrect. Therefore, Option C is the exception - it does not accurately describe a bias that overstates expected returns of illiquid assets.
Author: LeetQuiz .
Ultimate access to all questions.
No comments yet.
illiquid asset returns are not returns. He claims that people overstate the expected returns and understate the risk of illiquid assets, and he attributes this to three key biases. According to Ang, each of the following is a bias that overstates the expected returns (and/or understates the risk) of illiquid assets EXCEPT which is not accurate?
A
Survivorship bias can inflate returns by 4.0% or more
B
Infrequent sampling (aka, infrequent trading) artificially reduces risk and risk-related metrics such as volatility, correlation and beta
C
Turnover bias decreases the typical time between transactions and tends to artificially increase the expected return by 5.0% or more
D
Selection bias (aka, reporting bias) is a distortion of the sample that artificially increases (ie, overestimates) alpha and artificially decreases (ie, underestimates) beta