Expected Rate of Return and Hubris Premiums-Following is the rate-of-return component information for First Venture investors:
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RETURN
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RATE COMPONENT
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COMPONENT
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Liquidity premium
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5.5%
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Risk-free rate
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6%
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Advisory premium
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9%
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Investment risk premium
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11.5%
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Target rate of return
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40%
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A. Calculate the expected rate of return before considering premiums for illiquidity, advisory activities, and hubris projections.
B. Estimate the hubris projections premium for this First Venture investment.