Following is the rate of return component information for FirstVenture investors
ID: 1170732 • Letter: F
Question
Following is the rate of return component information for FirstVenture investors.
Rate Return
Component Component
Liquidity premium 5.5%
Real rate 3
Inflation premium 3
Advisory premium 9
Investment risk premium 11.5
Target rate of return 50
The hubris projections premium for this FirstVenture investment is:
(a)17.5%
(b) 18%
(c)18.5%
(d)19%
(e)19.5%
can you show me step by step?
Explanation / Answer
Answer:
Expected rate of return = Riskfree rate + Investment risk premium
Nominal riskfree rate = ( 1 + real riskfree rate) x ( 1 + rate of inflation ) - 1
Nominal riskfree rate = ( 1 + 0.03) x ( 1 + 0.03 ) - 1 = 0.0609 = 6.09%
Expected rate of return = 6.00% + 11.5% = 17.5%
hubris projections premium = Target rate of return - Expected rate of return - Liquidity premium - Advisory premium
hubris projections premium = 50% - 17.5% - 5.5% - 9% = 18%