Are you risk-averse risk-neutral or risk-lover

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Economic Risks and Uncertainty

A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump-sum of $10mln, or in parts, where $5.5mln can be provided in year 1, and another $5.5mln can be provided in year 2. Assuming the opportunity interest rate is 6%, what is the present value of the second alternative? Which of the two alternatives should be chosen and why?

An angel investor is considering investing in one of two start-up businesses and is evaluating the expected returns along with the risk of each option in order to choose the better alternative.

Business 1 is an innovative protein energy drink, which has ENPV of $100,000 with a standard deviation of $40,000.

Business 2 is a unique chicken wings dipping sauce with an ENPV of $60,000 and a standard deviation of $25,000.

a) Apply the coefficient-of-variation decision criterion to these alternatives to find out which is preferred by the angel investor, assuming that he/she is risk-averse.

b) Apply the maximin criterion, assuming that the worst outcome in Business 1 is to lose $5,000, whereas the worst outcome in Business 2 is to make only $5,000 in profit.

c) If you were the angel investor, what is your certainty equivalent for these two projects? Are you risk-averse, risk-neutral, or risk-lover?

Reference no: EM13247490

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