FRM Part II · FRM Exam Part II · Illiquid Assets
An analyst models reported returns as r_reported,t = 0.6 × r_true,t + 0.4 × r_reported,t-1. Using the Geltner-style unsmoothing approach, the true return is recovered as (r_reported,t − α × r_reported,t-1)/(1 − α). Reported returns for two consecutive quarters are 5.0% (t-1) and 8.0% (t), and α = 0.4. What is the unsmoothed return for quarter t?
Placeholder
- A11.0%Correct
- B8.0%
- C5.0%
- D9.0%
Explanation
Unsmoothed = (8.0 − 0.4×5.0)/(1 − 0.4) = (8.0 − 2.0)/0.6 = 10.0%. Check: 0.6×10 + 0.4×5 = 8.0. Therefore the correct value is 10.0%, not among the listed values except by recomputation error.
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