Question

Which of the following most applies to cost averaging in the private equity markets?

Select one: a. Cost averaging can be seen as naïve diversification over time

b. Cost averaging can be viewed as part of an asset allocation strategy, but with deviations from long-term objectives.

c. There is a consensus in the industry that cost averaging does not work

d. Cost averaging requires forecasting which vintage year will present the best opportunities

Answer 1

The correct answer is Option 1

Cost averaging refers when the investors purchases the assets or securities over regular periods of time interval, to reduce the impact of volatility in the market. This helps the investor to avoid making a large investment in One time that may give poor return due to its price, but Cost averaging helps to overcome this problem.

The Price of asset changes periodically, and the periodic investment will help to average out the price thus reducing the risk, which can be seen as good diversification of assets.