A Canadian institutional investor is evaluating a private equity fund that specializes in venture capital. The fund targets early-stage technology companies with high growth potential. Which of the following statements best describes the typical risk-return profile associated with this type of investment?

Question: A Canadian institutional investor is evaluating a private equity fund that specializes in venture capital. The fund targets early-stage technology companies with high growth potential. Which of the following statements best describes the typical risk-return profile associated with this type of investment?

Answer options:

• Low risk, moderate returns with high liquidity.
• Moderate risk, moderate returns with predictable cash flows. ✅ High risk, potentially very high returns, but significant Illiquidity.
• Low risk, stable returns, and strong correlation to public markets.

Correct answer: High risk, potentially very high returns, but significant Illiquidity.

Explanation: Venture capital involves investing in nascent companies where the chance of failure is high, justifying the 'high risk.' However, successful investments can provide 'very high returns,' but these investments are 'illiquid' due to their private nature and long holding periods.