Explanation:
The Liquidity Duration Statistic (LDS) represents the number of days required to liquidate a position in an orderly fashion, without causing a significant market impact. In this case, an LDS of 1 for the XYZ Corp position implies that AlfaBeta Capital would require 1 day to liquidate the position without causing a significant market impact.
B, C, and D are incorrect as per the above explanation.
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Q.2522 Camille is a risk manager at AlfaBeta Capital, a hedge fund specializing in a mix of equity and fixed income investments. In a recent portfolio review, Camille and her team identified a substantial position in a particular security, XYZ Corp, that they hold. To better understand the liquidity risk associated with this position, Camille decides to calculate the Liquidity Duration Statistic (LDS). The fund owns 10,000 shares of XYZ Corp, whose daily trading volume is typically around 100,000 shares. The firm has a policy of not exceeding more than 15% of the daily volume in any given security during liquidation to avoid a material market impact. Based on this information, Camille's calculations yield a value of 1 for the LDS of XYZ Corp. What does this value of LDS imply about the XYZ Corp position?
A
AlfaBeta Capital would require 1 day to liquidate the XYZ Corp position without causing a significant market impact.
B
The XYZ Corp position contributes 1% to the portfolio's overall liquidity risk.
C
AlfaBeta Capital would experience a 1% market impact cost if the XYZ Corp position was liquidated immediately.
D
AlfaBeta Capital could liquidate up to 1% of the XYZ Corp position daily without causing a significant market impact.
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