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 asset is highly correlated with the public equity market.
- It proves the existence of a robust 'Illiquidity Premium'.
- It suggests the asset has a high 'Information Ratio'.
- It is a statistical 'tell' of return smoothing, which understates true volatility and correlation.
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