medium · FRM Part 2 Risk & Investment Management
An investment analyst finds that a private equity fund's reported returns exhibit an autocorrelation of 0.45.
After 'unsmoothing' the returns, what will be the effect on the fund's measured volatility and its beta relative to a public benchmark?
- Measured volatility will increase, and the beta will likely increase when using summed (lagged) betas.
- The beta will decrease because the fund's returns are shown to be less correlated with current market moves.
- Measured volatility will decrease, as the unsmoothing process removes noise from the appraisal data.
- Volatility will remain unchanged, but the Sharpe ratio will improve due to more accurate return timing.
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