Is there any relevance to it other than telling you it is illiquid? For example, would an asset with a lock-up period of 3 years have a different liquidity premium than an asset with a lock up period of 7 years all else equal?
you at an illiquidty premium on the adjusted risk premium
^Thanks
I think I understand that but am confused on the duration of the lockup period and it’s significance. For example, if I calculate the risk premium as being 6% with Singer Terharr and the asset has a standard deviation of 30%, I have a sharpe ratio of 0.20. Supposed the sharpe ratio of the GIM is 0.25. To bring the assets sharpe ratio up to 0.25 from 0.20, I would need to increase the risk premium to 7.5%, which implies a liquidity premium of 1.5% (7.5%-6.0%)… Where I am lost is the meaning of the lockup period… In this example, would a lockup period of 3 years and a lockup period of 7 years have any difference in the illiquidity premium or is it just letting you know that the asset is illiquid and you need to calculate a illiquidity premium, thereby making the time of the lockup period irrelevant??
a lock-up period of 7 yrs has a higher illiquidiy premium than a lock up period of 3 yrs…
the risk premium of the GIM does not change based on the lockup period, only the risk premium of asset in question.
so RP(i) = sigma(i) * rho(i,GIM) * sharpe(GIM) + Illiquidity premium
all else equal, the higher the illiquidity premium on the asset, the higher is the risk premium