- Illiquid assets offer both diversification benefits and an expected return discount relative to similar liquid assets as compensation for illiquidity.
- Easily tracked indexes in asset classes similar to that of an illiquid asset often do not represent the non-idiosyncratic risk of the illiquid asset very accurately.
- Unfortunately, there are no low-cost passive investment vehicles available to allow one to closely track the aggregate performance of less liquid asset classes.
Which of Gruber’s statements regarding illiquid assets is most accurate?
- Statement 1
- Statement 3
- Statement 2
B is correct. Statement 3 is the most accurate. Low-cost passive vehicles for tracking performance exist for publicly traded liquid assets but do not exist for illiquid assets.
A is incorrect. Statement 1 is incorrect because an illiquid asset usually has a premium associated with its return due to the illiquidity.
C is incorrect. Statement 2 is incorrect because easily tracked indexes for an asset class usually do not capture the idiosyncratic risk component of less liquid assets.
