The standard approach to measuring portfolio risk – regressing portfolio return on market return-understates the risk of venture capital, buyouts (private equity), real estate, and other alternative assets not traded in active markets, generally by more than half.  The downward bias arises from the use of a mix of current and stale valuations in the calculation of return.  Here is an approach to measuring the risk that fully addresses the staleness issue.  The technique extends the standard regression by adding lagging market returns.

Measuring Risk for Venture Capital and Buyout Portfolios.

Author: Susan Woodward, Ph.D., Sand Hill Econometrics