Explanation:
Andrew Ang cites three key biases that distort the reported performance of illiquid assets, causing people to overstate expected returns and understate risk:
C is the EXCEPTION (not accurate): "Turnover bias" is not one of the three key biases described by Ang in this context.
A is accurate: Survivorship bias is a major issue in illiquid databases because poorly performing funds or assets are dropped or liquidated, which can easily inflate historical returns by 4% or more. B is accurate: Because illiquid assets do not trade continuously, infrequent sampling smooths out the price curve, which artificially depresses measured volatility, correlation with other assets, and beta. D is accurate: Selection bias occurs when data is voluntarily reported or when only certain assets are observed (e.g., when a successful transaction occurs). This inflates alpha (returns seem better) and lowers beta (systematic risk is under-measured).
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707.2. Andrew Ang makes an important, provocative statement when he writes "Reported illiquid asset returns are not returns."¹ 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
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