Abstract
Private equity is a critical asset that has become widely accepted as a key component of investment portfolios. Its major virtue is that it delivers attractive risk-adjusted returns with fairly low correlation to equities and bonds. Recent developments, however, imply that performance may be weak in the near future, particular for venture capital. This study employs mean-variance asset allocation to determine the optimum exposure to private equity. Specifically, long-run risk for private equity is compared to that for other assets, and assumptions regarding future performance are very conservative. Results demonstrate that substantial allocations to private equity are appropriate under a variety of alternative conditions.
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