In the 2014 AM Mock, the Illiquidity Premium is Added to the Segmented Portion and Integrated Portion BEFORE weighting it with the Correlation with GIM.
Topic Test “Capital Market Expectations - Ptolemy” adds the Illiquidity Premium only once AFTER weighting the Segmented & Integrated Portion, with the Risk-Free Rate.
A few PQs I did with Schweser Only added the Illiquidity Premium to the Intergrated Portion BEFORE weighting it with the Correlation with GIM, and didnt add the Illiquidity Premium to the Segmented Portion…
Is there a reason for this? Am I missing something…?
If the premium is added to the segmented AND integrated portions, then it doesn’t matter if it’s added before or after, since the weights of segmented and integrated add up to 1.
For Schweser, I don’t know why they would only add to integrated. Does it mention anything specifically in the explanations? It might just be Schweser being Schweser.
The first 2 examples basically means the same thing. So if you add the illiquidity premium in the Integrated ERP(I) and Segmented ERP(S) calcs, that means your weighted average ERP(i) would already have incorporated the illiquidity factor. In this case, you don’t need to add it once more when you’re working out the expected return.
But if you didn’t add the illiquidity premium when calculating the WA of ERP(i), then you can add it once after the weighted average, when you’re adding it with the risk freer rate.
I’m not sure why Schweser didn’t add the illiquidity premium to the segmented portion… doesn’t make sense to me.