02505cam a22002417 4500001000600000003000500006005001700011008004100028100002200069245008700091260006600178490004100244500001800285520154400303530006101847538007201908538003601980690005602016710004202072830007602114856003702190856003602227w8066NBER20150425092345.0150425s2001 mau||||fs|||| 000 0 eng d1 aCochrane, John H.14aThe Risk and Return of Venture Capitalh[electronic resource] /cJohn H. Cochrane. aCambridge, Mass.bNational Bureau of Economic Researchc2001.1 aNBER working paper seriesvno. w8066 aJanuary 2001.3 aThis paper measures the mean, standard deviation, alpha and beta of venture capital investments, using a maximum likelihood estimate that corrects for selection bias. Since firms go public when they have achieved a good return, estimates that do not correct for selection bias are optimistic. The selection bias correction neatly accounts for log returns. Without a selection bias correction, I find a mean log return of about 100% and a log CAPM intercept of about 90%. With the selection bias correction, I find a mean log return of about 7% with a -2% intercept. However, returns are very volatile, with standard deviation near 100%. Therefore, arithmetic average returns and intercepts are much higher than geometric averages. The selection bias correction attenuates but does not eliminate high arithmetic average returns. Without a selection bias correction, I find an arithmetic average return of around 700% and a CAPM alpha of nearly 500%. With the selection bias correction, I find arithmetic average returns of about 53% and CAPM alpha of about 45%. Second, third, and fourth rounds of financing are less risky. They have progressively lower volatility, and therefore lower arithmetic average returns. The betas of successive rounds also decline dramatically from near 1 for the first round to near zero for fourth rounds. The maximum likelihood estimate matches many features of the data, in particular the pattern of IPO and exit as a function of project age, and the fact that return distributions are stable across horizons. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG0 - General2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w8066.4 uhttp://www.nber.org/papers/w806641uhttp://dx.doi.org/10.3386/w8066