I came across a GK question which included an Illiquidity premium, and I included it (apparently incorrectly). I think it was only included to throw people off, because they also gave all of the other inputs for the segmented/integrated calculation (which definitely includes illiquidity premium). I guess we don’t care about things like illiquidity premiums when we’re throwing together a GK E® right?
Right, that’s a distracter…had it on an old exam as such as well.
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how come GK is such a big thing in this forum? i put $50 its not going to be tested
monki Wrote: ------------------------------------------------------- > how come GK is such a big thing in this forum? i > put $50 its not going to be tested It was very recently…
btw, i agree GK is easy points if on the exam (and doesn’t include illiquidity) that said, can we also agree that SS6 really sucks? i hate reading over this stuff, but i know at least 1 question in morning will use it. hope its segmentation/integrationg, but i’m sure i’m not that lucky.
monki Wrote: ------------------------------------------------------- > how come GK is such a big thing in this forum? i > put $50 its not going to be tested It accounted for 19 points in 2007… so I wouldn’t make that bet.
KRochelli Wrote: ------------------------------------------------------- > that said, can we also agree that SS6 really > sucks? i hate reading over this stuff, but i know > at least 1 question in morning will use it. > > hope its segmentation/integrationg, but i’m sure > i’m not that lucky. I think our friend from SS6 this year will be something on Business Cycles (possibly Slowdown or Recession).
speaking of illiquidity premium----which very well could be an exam topic. adjust return of asset to meet market Sharpe ratio. the difference in return is your illiquidity premium, correct? its kind of hidden in schweser as well. (always a red flag)
you can talk about liquidity premium when you talk about required fixed income return (bonds) though
KRochelli Wrote: ------------------------------------------------------- > speaking of illiquidity premium----which very well > could be an exam topic. > > adjust return of asset to meet market Sharpe > ratio. the difference in return is your > illiquidity premium, correct? > > its kind of hidden in schweser as well. (always a > red flag) Where is this in Schweser? I would think that the difference between an asset’s return per unit of risk and the market could be based on really anything that is unique to the security. credit/liquidity/probability of future income/etc. not just a single factor.
one example like that is about value stocks which appear undervalued but sometimes it’s just an extra risk not recognized by some investors and in a lot of cases is an iliquidity premium. but I’d love to hear more about an example from KRock
pop, you have schweser right? I can’t point out the page number for you. It is under Capital Market Expectations - equilibrium models. Basically you can use the sharpe ratio of the market and the current sharpe ratio of the investment to figure the illiquidity premium on the investment. It is in the same section as figuring the ERP for integrated vs segmented markets.
So anyone care to comment in which cases we MUST include illiquidity premium? TIA
GK doesn’t include a liquidity premium, so if the question says “Use GK to compute X,” then don’t do it. On the other hand, it seems sensible to account for an illiquid asset, so if it’s on the written portion and you say, GK says that this is the return, and I’m going to add an illiquidity premium because this is an illiquid asset and GK doesn’t account for liquidity, then that sounds sounds pretty defensible.
The illiquidity premium seems to come into play with the Singer-Terhaar model and considering a segmented market only. I got the GK question wrong as well by putting the illiquidity premium in there. Scary.
FastEd Wrote: ------------------------------------------------------- > The illiquidity premium seems to come into play > with the Singer-Terhaar model and considering a > segmented market only. Yes, this is what I was thinking about.
florinpop Wrote: ------------------------------------------------------- > one example like that is about value stocks which > appear undervalued but sometimes it’s just an > extra risk not recognized by some investors and in > a lot of cases is an iliquidity premium. > but I’d love to hear more about an example from > KRock its under SS6. the example goes something like this. illiquid asset has expected return of 16%. Sharpe ratio of market implies 25% return on the market—therefore the illiquidity premium is 9%–what you would need to add to return of asset to equate the market Sharpe ratio
Oh, GK you totally jogged my memory, yes according to CFAI illiquidity premium is only used with Singer Terhar/ segmented market. Thanks.