Question: Please only answer this question if you are sure you are correct. Thank you so much! You have $10,000 and you face the following investment
Please only answer this question if you are sure you are correct. Thank you so much!
You have $10,000 and you face the following investment choice. You can either buy 5-year, risk- less Treasury notes with a return of 5%, or you can invest in your own start up. The start-up investment costs you $10,000 and yields $100,000 if you succeed and you manage to sell the start-up to Google, which you estimate might realistically happen with 10% probability. Otherwise, with 50% probability you get your money back and with remaining probability you lose everything. Assume that you can find other investors if you want to only put down a fraction of your money in the start-up. Part A: Calculate the expected return of the two investment possibilities that you have and compare them. Part B: Suppose that you are indifferent between receiving a return of 5% for sure or buying a risky asset that has an expected return of 8% and a volatility of 10%. How much of your own wealth would you optimally invest in the risky project
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