Question

The Largeco pension fund aggregates its entire portfolio every month across all asset classes and computes its net returns, Ri. Exhibit 4-7 displays these monthly returns for one year, along with the market returns and the risk free treasury bill rates for those months. Use equation (4.1) and (4.2) to estimate the beta, alpha, and cost of capital for the Largeco portfolio. How do you evaluate its investment performance?

[Hints: Use Microsoft Excel spreadsheets. You have to first use equation 4.2 frameworks to obtain regression-ready data from exhibit 4-7. Then use excel add on feature to conduct regression using the obtained data. Then identify what is the alpha, the beta and the risk free rate (assume risk free rate is 4% for this exercise). Then plug the alpha , beta and the risk free rate to obtain the cost of capital using the equation 4.1 set up (i.e., cost of capital = Risk free rate + Beta × (regression alpha that you obtained from regression)

Q2.Early stage venture capital should earn a higher expected return than later-stage venture capital, because early stage ventures have a higher failure rate than later-stage ventures. (Please use the space provided below to answer this question. Please be brief but clear in reasoning and referencing)

Answer 1