Which of the following statements is least likely correct: I) Investments valued on a "mark-to-model" basis provide precise and accurate valuations. II) Level 3 asset pricing requires rigorous testing and calibration of models. III) Conventional asset classes heavily rely on Level 3 inputs for fair value measurements.Question 7Answera.I and II onlyb.I,II and IIIc.III only
Question
Which of the following statements is least likely correct: I) Investments valued on a "mark-to-model" basis provide precise and accurate valuations. II) Level 3 asset pricing requires rigorous testing and calibration of models. III) Conventional asset classes heavily rely on Level 3 inputs for fair value measurements.Question 7Answera.I and II onlyb.I,II and IIIc.III only
Solution
The statement that is least likely correct is: I) Investments valued on a "mark-to-model" basis provide precise and accurate valuations.
Here's why:
I) Mark-to-model is a valuation method for certain types of financial assets/investments that are not regularly traded and therefore do not have easily identifiable market prices. Instead, their value is estimated using financial models, which inherently involve assumptions and approximations. Therefore, they do not provide "precise and accurate" valuations, but rather estimates that are subject to uncertainty.
II) Level 3 asset pricing does indeed require rigorous testing and calibration of models. These are assets for which there is no observable market, so their pricing is based on unobservable inputs and assumptions, which need to be carefully tested and calibrated.
III) Conventional asset classes do not heavily rely on Level 3 inputs for fair value measurements. Level 3 inputs are used when observable market data is not available, which is not typically the case for conventional asset classes like stocks and bonds.
So, the answer is a. I only.
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