A New Approach of Valuing Illiquid Asset Portfolios

Abstract

This paper proposes a new approach of valuing portfolios that contain illiquid assets. The approach has three major advantages. First, the estimators are arithmetic averages of individual asset returns or their proxies, so they strictly correspond to actual portfolio returns. Second, the approach is able to value portfolios in which assets are arbitrarily weighted, including equal-weighted, price-weighted and value-weighted portfolios. Third, the model is easy to extend to incorporate asset characteristic data to improve the accuracy. Simulations with actual data of Dow Jones Industrials show that this new approach provides superior estimators than some currently available alternatives.

JEL Classification: C43, G10