Explanation:
Mary's assertion is false. In illiquid asset classes, it is notoriously difficult to find appropriate tradable benchmarks. Because these assets are not continuously priced and transparent, separating factor risk (beta) from manager skill (alpha) is very challenging. For this reason, identifying and relying on genuine manager skill is critical when allocating to illiquid asset classes (making Peter's statement true). Phillip and Debra's statements align with the principles of liquidity premiums: longer lock-ups necessitate higher hurdle rates and generally result in lower optimal overall allocations to maintain adequate portfolio-level liquidity.
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708.3. You are consulting to a large endowment fund that is in the process of determining its asset allocation budget. An important sub-project in this process is a recommendation for the definition of, target allocation to, and hurdle rates associated with, illiquid assets. In short, you need to help develop the endowment’s Portfolio Choice Model for illiquid assets. In regard to this sub-project, members of your staff (Phillip, Debra, Peter, and Mary) makes suggestions that include the following four assertions. According to Ang, each of these is true EXCEPT which is probably false?
A
Phillip says: The longer the time between liquidity events for an asset--ie, the less liquid the asset--the LOWER its optimal allocation in the portfolio
B
Debra says: The longer we need to wait to exit an investment--ie, the later the arrival of liquidity events--the HIGHER should be our illiquidity hurdle rate
C
Peter says: Due to the nature of factor risk and idiosyncratic risk in illiquid markets, to the extend we allocate to illiquid assets, it is really important for us to assign (or delegate to) genuinely skilled investors to this asset class
D
Mary says: It's actually not very important that we identify skill in the illiquid asset class because we can rather easily benchmark against tradeable indexes which will allow us to separate factor risk from manager skill (aka, alpha)