It is given that one could estimate the multi-period sharpe ratio for the investment over the time until it is liquid and compare it to the estimated multi-period sharpe ratio for the market. The sharpe ratio for the illiquid asset must be as high as the sharpe ratio for the market.
I don’t understand this concept. Can anyone please explain? Thanks.
For an illiquid investment - say you have a lockup period of 8 years. And its ICAPM required rate of return is 12% and its MPSR is lower than the GIM at 0.67 for the 8 year horizon. If increasing the ICAPM required return to 20% makes the MPSR same as the GIM - then the illiquidity premium for the investment is 20% - 12% = 8% over the 8 year horizon.