>c. When alpha goes below 2, the expected return also becomes infinite, so ERiβ=∞∞. This is an undefined quantity and can’t be compared apples to apples to ERm.

>c. When alpha goes below 2, the expected return also becomes infinite, so ERiβ=∞∞. This is an undefined quantity and can’t be compared apples to apples to ERm. Are these good investments? What we know is that early stage venture funds seem to have alphas of about 1.95, just below 2 (see the post I referenced above). This is the area where venture capitalists operate. To me, it seems that there needs to be a better technical model to describe risk reward in the alpha < 2 area. How do you even define beta/alpha for something pre revenue? Do you know of any interesting conditional expected return models that incorporate time value of money? Only thing in my mind that makes sense to me is if there was a concept of delta-neutral investing like there is in options market, where you should invest in an incumbent company while at the same time taking a position in a start up that could put that company out of business in the future, while trying to manage the position by taking profit when the value of the incumbent starts to exceed the amount invested in the start up.