Explanation:
Selection bias is a type of distortion that can occur in financial and economic data. It arises when the returns are only observed or recorded when the underlying asset values are high. This can lead to an overestimation of the average return and an underestimation of the risk. For instance, properties are often sold when their values are high, and companies are typically made public when stock values are high in buyout funds. This selective observation can skew the data and create a bias that can impact investment decisions and risk assessments.
Choice B is incorrect. Survivorship bias refers to the tendency of remaining funds in a market to have better past performance, primarily because funds with poor performance are likely to be withdrawn from the market. This does not align with the scenario described in the question where returns are only recorded when asset values are high.
Choice C is incorrect. Infrequent trading refers to a situation where assets are not traded on a regular basis, which can lead to stale or outdated prices and thus distort return calculations. However, this concept does not directly relate to recording returns only when asset values are high.
Choice D is incorrect. The scenario described in the question clearly represents an instance of selection bias, hence it cannot be 'None of the above'.
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Q.2428 The bias associated with returns being observed only when the underlying asset values are high is best known as:
A
Selection bias
B
Survivorship bias
C
Infrequent trading
D
None of the above