medium · FRM Part 2 Risk & Investment Management
A sovereign wealth fund with a 50-year horizon argues that illiquidity risk is irrelevant because they never intend to sell.
Which factor most directly challenges this 'textbook holder' assumption?
- The fund will be unable to earn the illiquidity premium if it never sells the asset.
- Standard risk models such as VaR simply cannot be computed for horizons beyond ten years or so.
- A 50-year investment horizon is actually shorter than the average life of a typical private equity fund.
- Political or economic crises may create sudden, large-scale contingent liabilities for the fund.
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