 # This could be a tough Q on exam day

an alt investment has lockup period of 8 yrs with expected required rate of return = 12% (based on ICAPM), the multi period sharpe ratio is 0.65% (this ratio could be increased by increasing rqd rate of return - i.e. every 1% increase in expected required rate of return will increase multi period sharpe ratio by 0.01%). the sharpe ratio for GIM = 0.7 what’s the illiquidity premium for this alt investment?

no risk free rate given ?

.01 = 1/x x = 10% So, 0.65 = 12-x/10 = x = 6.5%. If there was no illiquidity then 0.70 = 12-x/10 x = 5% So illiquidity = 6.5% - 5% = 1.5% am i close?

need to increase the required return to make the multi period sharpe ratio = GIM sharpe ratio, therefore you need another 5% on your required return. this 5% is the illiquidity premium for this alt investment

gee, ryanunsw, you are going to put everybody in a panic mode. First i am still not grasping what this multiperiod sharpe ratio is …

This could be a question and this WILL be one I Eat…

That question was way too easy… Of course I have to think its some hard a\$\$ problem, but no the Sharpe ratios are only .05 different and each 0.01 different is 1% so 5 x 1% = 5%…

I don’t even know what reading this is from. Am I in trouble?

it’s easy once the concept the crystal clear thought about this when i reviewed the seg/int market regarding illiquidity premium, then the text shows an example on illiq preimium on alt inv - thought would be a very good concept check for the exam day (plus it’s not mentioned in Schewser)

no, i am still in the dark, Too Old, check the page48. vol 3.