Mr. Sam Golff desires to invest a portion of his assets in rental property. He h

Question

Mr. Sam Golff desires to invest a portion of his assets in rental property. He has narrowed his choices down to two apartment complexes, Palmer Heights and Crenshaw Village. After conferring with the present owners, Mr. Golff has developed the following estimates of the cash flows for these properties.

Palmer Heights

Yearly Aftertax Cash Inflow (in thousands) Probability
$60 .1
65 .2
80 .4
95 .2
100 .1

Crenshaw Village

Yearly Aftertax Cash Inflow (in thousands) Probability
$65 .2
70 .3
80 .4
90 .1

a. Find the expected cash flow from each apartment complex. (Enter your answers in thousands (e.g, $10,000 should be enter as "10").)

b. What is the coefficient of variation for each apartment complex? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

c. Which apartment complex has more risk?

Explanation / Answer

Mean or Expected cash flow of Palmer heights=0.1*60+0.2*65+0.4*80+0.2*95+0.1*100=80
Mean or Expected cash flow of Crenshaw village=0.2*65+0.3*70+0.4*80+0.1*90=75

Standard Deviaiton of Palmer Heights=sqrt(0.1*(60-80)^2+0.2*(65-80)^2+0.4*(80-80)^2+0.2*(95-80)^2+0.1*(100-80)^2)=13.0384

Standard Deviaition of Crenshaw village=sqrt(0.2*(65-75)^2+0.3*(70-75)^2+0.4*(80-75)^2+0.1*(90-75)^2)=7.745967

Coefficient of variaiotn=Standard Devaiiton/Mean

Coefficient of variation of Palmer Heights=13.0384/80=0.16298
Coefficient of variation of Crenshaw Village=7.745967/75=0.10328

Higher the coefficient of variaiton, higher is the risk
Hence, Palmer Heights has more risk

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