Abstract
In exploration ventures where a high gain can be anticipated if the venture is successful, the risk adjusted value shows an anomalous behaviour with increasing value of the venture such that the optimum working interest first increases and then decreases as the value increases. This paradoxical behaviour was “resolved” previously by going outside the framework of the corresponding risk adjusted value formula and adding extraneous constraints. The present paper shows that a complete resolution to the paradox is available while staying precisely within the bounds of the corresponding risk adjusted value formula and without any extraneous constraints. This novel resolution allows one to use many of the risk adjusted formulae available under more general conditions than were thought to be relevant because of the appearance of what seemed to be an insurmountable paradox. A few simple numerical examples are provided to show how one handles this new resolution in pragmatic situations.
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