medium · FRM Part 2 Risk & Investment Management
In the context of the 'bias stack', why does 'stale marking' lead to an underestimation of drawdowns?
- Because the 'denominator effect' forces managers to write up appraised values during periods of crashing markets.
- Because appraisal values are anchored to previous marks and do not reflect the full magnitude of market troughs.
- Because most illiquid asset classes are assumed to carry essentially zero correlation with the broader global economy.
- Because drawdowns, by strict definition, can only occur in liquid, continuously market-traded financial instruments.
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