realized quarterly return on the VC portfolio, Rft represents the risk-free rate for borrowing and lending, Rmt
Question:
realized quarterly return on the VC portfolio,
Rft represents the risk-free rate for borrowing and lending,
Rmt
is the realized return on the market portfolio,
β (beta) is the regression slope coefficient,
α (alpha) is the regression intercept,
And eit
is the regression error term.
All variables are measured quarterly with time periods given by t. The regression produces statistically
significant estimates of β = 0.6155 and α = 4.00 (annualized), with an R
2 of 0.32. Members of your staff: Paul,
Jonnie, Duncan, Michael, and Maisie raise several concerns with these results.
the Chief Financial Officer, you are the expert and highest level of decision making and expected to make
the evaluation of the concerns on the basis of valid/invalid with the comments why, and are there any
possible fixes?
I. Paul has the thought that the determined alpha is too high because of survivor bias.
II. Jonnie has the thought that the determined beta is too low because of a stale value problem.
III. Duncan thinks that this model does not properly adjust for the high probability of failure
for VC investments.
IV. Michael thinks that this model does not properly adjust for the illiquidity of VC investments.
V. Maisie thinks something else is wrong, but she cannot put her finger on it.
Statistics and Data Analysis for Financial Engineering
ISBN: 978-1461427490
1st edition
Authors: David Ruppert