coefficient p between these public equity and private equity portfolios is given by p = -^ (28.4) In both equation (28.2) and equation (28.3) we can see that the expected excess return and the volatility of the private equity portfolio are partly related to the public market, and partly due to investor skill or information (on the one hand) and risks unrelated to the public market (on the other). What values should be assumed for the parameters a, p, and oj Once again, this will depend on the skill of the investor and the approach taken to diversification, but some observations seem possible. First, let us consider p. Since private equity is, after all, some kind of equity, a value near 1 seems a priori reasonable. For companies that have a strongly innovative component to their business models, a lower value might be expected. For companies that just use a higher degree of financial leverage with no real sources of innovation, or companies that are just copies of recent, successful companies, a value of p closer to 2 might be expected. In addition, the carried interest paid on investments in partnerships can reduce the effective p by about 20 percent. We have performed some simulations that suggest that a value consistent with the Venture Economics database would be near 0.7, but this is subject to all of the qualifications cited earlier regarding the limitations of publicly available data in private equity. Thus, much as in the public equity market, private equity investors can produce portfolios of high or low p, depending on their choices in constructing their portfolios. Next, let us consider o^. Clearly a very small or poorly diversified portfolio of private equity could have a very large value of on, perhaps in the vicinity of 100 percent, which would be consistent with single stocks of companies that have recently gone public. A larger, more diversified portfolio of private equity might have a significantly smaller value. At the lower extreme, a portfolio of 20 partnerships, each with 20 investments, could have 100% P= ,--------- --------------------------------- =5% (28.5) ■^20 partnerships.20 companies We have performed some simulations that suggest that a value for a large, well-diversified private equity portfolio, consistent with the Venture Economics database, might be near 15 percent, but once again this is subject to all of the qualifications cited earlier regarding the limitations of the publicly available data. Certainly values of up to 25 percent would not be unreasonable for some private equity portfolios. Finally, let us consider a. Although the market inefficiencies described earlier