Entrepreneurial Business Plan Under Undiversifiable Idiosyncratic Risk

52 Pages Posted: 20 Apr 2015

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Hyun-Tak Lee

Risk Management Institute (RMI), National University of Singapore (NUS)

Seyoung Park

Loughborough University - School of Business and Economics

Date Written: April 20, 2015

Abstract

This paper presents an entrepreneurial optimal business plan in which optimal consumption and portfolio rules, and optimal exit strategy for an entrepreneur are jointly determined in the presence of undiversifiable idiosyncratic risk. We find that the entrepreneur is more likely to exit from her risky business as investment opportunity worsens or as her risk aversion coefficient increases or as the idiosyncratic risk increases. When the entrepreneur decumulates wealth, she can achieve a partial hedging effect of a risky portfolio against the business risk by optimally increasing her risky portfolio as the idiosyncratic risk increases. Accordingly, stock market participation is of importance to the entrepreneur for the purpose of risk diversification and a smooth continuation of her risky business.

Keywords: optimal consumption, optimal portfolio, entrepreneurial business, idiosyncratic risk, risky business

JEL Classification: C61, G11, M13

Suggested Citation

Jang, Bong-Gyu and Lee, Hyun-Tak and Park, Seyoung, Entrepreneurial Business Plan Under Undiversifiable Idiosyncratic Risk (April 20, 2015). Available at SSRN: https://ssrn.com/abstract=2596490 or http://dx.doi.org/10.2139/ssrn.2596490

Bong-Gyu Jang (Contact Author)

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Hyun-Tak Lee

Risk Management Institute (RMI), National University of Singapore (NUS) ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Seyoung Park

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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