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Answer: These charts demonstrate that there do exist large illiquidity risk premiums ACROSS asset classes
## Explanation Based on the description of the scatterplot showing asset class returns versus illiquidity: - **The scatterplot shows a positive relationship between illiquidity (x-axis) and long-run average returns (y-axis)** - **Venture capital (most illiquid) shows the highest returns** - **This demonstrates that less liquid asset classes tend to offer higher returns to compensate for their illiquidity** **Analysis of each option:** - **Option A**: "In general illiquid asset classes offer high risk-adjusted returns" - This is incorrect because the chart shows raw returns, not risk-adjusted returns. Illiquid assets may have higher raw returns but not necessarily higher risk-adjusted returns after accounting for their higher risk. - **Option B**: "These charts demonstrate that there do exist large illiquidity risk premiums ACROSS asset classes" - **CORRECT**. The scatterplot clearly shows that as we move across different asset classes from more liquid to less liquid, returns increase, indicating an illiquidity risk premium exists across asset classes. - **Option C**: "There do exist large illiquidity risk premiums WITHIN many asset classes, but not ACROSS asset classes" - This is the opposite of what the chart shows. The chart demonstrates the relationship ACROSS asset classes. - **Option D**: "Illiquid equities earn the same returns as liquid equities; and illiquid bonds earn the same returns as liquid bonds" - This contradicts the fundamental concept of illiquidity risk premium, where investors demand higher returns for holding less liquid securities. The scatterplot provides empirical evidence supporting the existence of illiquidity risk premiums across different asset classes, with venture capital (most illiquid) showing the highest returns, consistent with option B.
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Q-56. This data is displayed below as a scatterplot where the y-axis is the long-run average return of the asset class and the x-axis is an index of illiquidity. A higher index (ie, to the right) implies less liquidity. For example, the venture capital as an asset class is assigned to the least liquid (most illiquid) asset class but it also plots the highest long-run average return.
[Image blocked: Asset class returns versus illiquidity]
In regard to the illiquidity risk premium, which of the following statements is TRUE?
A
In general illiquid asset classes offer high risk-adjusted returns
B
These charts demonstrate that there do exist large illiquidity risk premiums ACROSS asset classes
C
There do exist large illiquidity risk premiums WITHIN many asset classes, but not ACROSS asset classes
D
Illiquid equities earn the same returns as liquid equities; and illiquid bonds earn the same returns as liquid bonds