What is expected profit and variance as million usd as unit

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Reference no: EM132792492

Financial Tools for Promoting Start-ups

Although business and government regard start-up business is vitally important in the future, the number of start-ups in Japan especially for those based on technology are still limited in the number. Risk-taking behavior of Japanese is associated with the low ratio of start-ups. There are various and abundant initiatives such as "small business innovation research (SBIR)" grant and other incentives are available. Still people familiar with start-up claim that real problem is the risk of cash flow of commercialization, ie. Risk of profitability of project in terms of cost and sales. In response, certain tool for stimulating start-ups should be installed in society.

Assume that there are start-up projects which have 90 percent of failure with zero profit, and 10 percent chance of success to achieve 100 Million USD profit. Analyze the following questions.

Question 1: What is expected profit and variance as Million USD as unit.

Question 2: A representative entrepreneur has risk attitude as shown in the utility function U(I)=√I where I is project profit, U is utility of an entrepreneur. Based on "Expected Utility Theory", what is his risk attitude, risk averter, neutral, lover ?

Question 3: Design the tool like "insurance" where individual entrepreneur pays the premium for the risk of zero profit. With the utility function of U(I)=√I, can you design an insurance?

Question 4: Design another financial tool such as stock issue for this project, or bank lending? Discuss the pros and cons of the financial tools including stock issue and insurance.

Reference no: EM132792492

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