FRM Part II · FRM Exam Part II · Illiquid Assets
Observed returns of an illiquid fund follow R_obs,t = 0.6 × R_true,t + 0.4 × R_obs,t-1 (a Geltner-type smoothing). The previous observed return was 5.0% and the current observed return is 8.0%. What is the unsmoothed true return for the current period?
The unsmoothed return is 10.0%. Subtract 0.4 times the prior observed return of 5.0%, leaving 6.0 from the observed 8.0%, then divide by the 0.6 weight on the true return. Checking: 0.6 times 10 plus 0.4 times 5 equals 8.
- A8.0%
- B10.0%Correct
- C10.3%
- D5.0%
Explanation
Unsmoothing: R_true = (R_obs,t − 0.4 × R_obs,t-1)/0.6 = (8.0 − 2.0)/0.6 = 10.0%. Check: 0.6×10 + 0.4×5 = 8. Using 0.4 as the divisor wrongly gives 15%, and ignoring the lag leaves 8%.
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