Explanation:
According to Andrew Ang, while there is strong evidence of an illiquidity premium within asset classes (e.g., less liquid stocks outperform more liquid stocks, or less liquid bonds outperform more liquid bonds), there is no clear evidence of an illiquidity premium across asset classes. For instance, the returns of illiquid asset classes like private equity or venture capital are often explained by other risk factors (such as equity risk and leverage) and biases (like survivorship and selection bias), rather than a premium for illiquidity itself. Therefore, statement C is correct.
Ultimate access to all questions.
708.1. In order to identify the presence of illiquidity risk premium(s), Andrew Ang references data presented by Antti Ilmanen in his well-regarded book Expected Returns (An Investor's Guide to Harvesting Market Rewards). This data is displayed below as a scatterplot⁴ 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 (i.e., 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.
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
No comments yet.