FRM Part II · FRM Exam Part II · Illiquid Assets
A risk manager unsmooths a hedge fund's returns using the Geltner-type approach, r_true(t) = [r_reported(t) - α r_reported(t-1)]/(1 - α), with α = 0.50. The fund reported 4.0% last quarter and 7.0% this quarter. What is the unsmoothed return for this quarter?
The unsmoothed return is 10.0%. Subtract half of last quarter's 4.0% from 7.0% to get 5.0%, then divide by one minus 0.50, giving 10.0%.
- A10.0%Correct
- B9.0%
- C5.5%
- D12.0%
Explanation
r_true = (7.0% - 0.50 × 4.0%)/(1 - 0.50) = 5.0%/0.50 = 10.0%. Averaging the two reported returns to get 5.5% ignores the formula, and using 7.0 - 4.0 without scaling by 1/(1-α) gives 3.0%/0.5 = 6%, also wrong.
Did you get it right without looking?
One question tells you little. A timed set on Illiquid Assets shows your real accuracy, how long you take and where you lose marks.
More Illiquid Assets questions
- A family office wants to increase its allocation to illiquid assets to capture an illiquidity premium, but it may need cash for unexpected n…
- A fund of funds offers quarterly redemptions to investors but holds mostly illiquid private credit positions. Which feature best mitigates t…
- A risk manager compares two portfolios with identical true annual volatility of 10%. Portfolio A holds listed equities. Portfolio B holds pr…
- A hedge fund reports monthly returns with first-order autocorrelation of 0.40 because many of its positions are marked using stale dealer qu…
- An endowment has a private equity fund commitment of USD 100 million. At the start of the year, unfunded commitment is USD 60 million and NA…
- An endowment has 40% of its assets in private funds with capital calls and limited distributions. A risk manager wants to assess how the por…