Explanation:
Both statements B and C are accurate. The fund manager's conclusion is incorrect because the low volatility of the fund, which primarily invests in illiquid assets, can give a misleading picture of the fund's total risk. This is due to two types of biases that can occur when risk measures are...
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Q.2481 A fund manager manages a fund which mainly invests in illiquid assets such as convertible bonds, which are traded infrequently. The manager computes the fund volatility and finds it to be on the lower side. He concludes that the fund has low total risk due to low volatility. Is the manager’s conclusion correct?
A
Yes, because volatility indicates the riskiness of an asset or portfolio. Therefore, low volatility leads to low risk.
B
No, because correlations with other asset classes will be artificially lowered, giving the appearance of low systematic risk.
C
No, because volatility will be artificially lowered, giving the appearance of low total risk.
D
Both B and C.
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