1. London purchased a piece of real estate last year for $84,300. The real estat
ID: 2631718 • Letter: 1
Question
1. London purchased a piece of real estate last year for $84,300. The real estate is now worth $105,000. If London needs to have a total return of 0.22 during the year, then what is the dollar amount of income that she needed to have to reach her objective?
2.Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 0.13 and 0.16, respectively. (Round your answer to 4 decimal places. For example .1244)
Probability
Return(A)
Return(B)
Good
0.35
0.30
0.50
OK
0.50
0.10
0.10
Poor
0.15
-0.25
-0.30
Probability
Return(A)
Return(B)
Good
0.35
0.30
0.50
OK
0.50
0.10
0.10
Poor
0.15
-0.25
-0.30
Explanation / Answer
Cost 84300 Return for 22% 18546 =the total income London needed to have for a return of 0.22 Total worth now should be 102846 The total worth alreadt exceeds the above. Probab Return A Return B Prob * a Prob * b Good 0.35 0.3 0.5 0.105 0.175 OK 0.5 0.1 0.1 0.05 0.05 Poor 0.15 -0.25 -0.3 -0.0375 -0.045 Average 0.1175 0.1800 Expected 0.13 0.16 Covariance 0.005171 Covaraince = E ( return on a - avverage return on a * return on b -average return on b ) / N-1
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