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?