medium · FRM Part 2 Risk & Investment Management
A risk manager is evaluating an 'Illiquid Asset' (e.g., Private Equity) using reported returns.
Why is the 'Autocorrelation' of these returns a significant concern for risk measurement?
- It indicates that the illiquid asset is highly correlated with the broad public equity market indices overall.
- It proves the existence of a robust and persistent 'Illiquidity Premium' investors can capture.
- It suggests the asset has an unusually high 'Information Ratio' relative to its peers.
- It is a statistical 'tell' of return smoothing, which understates true volatility and correlation.
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