In the topic test Ptolemy the illiquidity premium is added after the weighting of the systematic risk premium by degree of integration, whereas in the 2014 Essay exam the illiquidity premium is added when calculating the risk premium under the assumptions of perfectly integrated/segmented.

Which method is correct?

Both should give you the same answer AFAIR

x * Illiquidity Premium + (1-x) Illiquidity premium = Illiquiity premium

and x = degree of segmentation.

see last part of if the answer above is not sufficient

(but it should)

Example in CFAI shows that it’s added to both intergrated and segmented.


Correct. Just go with what the Institute wrote in the textbook