Suppose two local start-ups are raising funding by issuing shares of equity at $1,000 per share....

Suppose two local start-ups are raising funding by issuing shares of equity at $1,000 per share. One start-up is a whiskey distillery; the other is a beer brewery. You estimate the expected returns on your investment to be 50% over five years in both cases. You also believe that the likelihood of being paid out $10,000 per share is greater with the distillery than with the brewery.

Suppose now that you hold a portfolio of many other risky assets, and that this would be your N + 1 investment.

Which investment do you prefer to make, the distillery or the brewery? Explain your logic.

If you require additional information, identify what information is needed. Note that the usual assumptions apply, namely that you are risk-averse, making optimal decisions, and the payoffs are normally distributed.

Expert Solution

jeff jeffy answered 1 year ago

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