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 Crenshaw Village Yearly Aftertax Yearly AftertaxCash inflow Cash inflow(in thousands) Probability (In thousands) Probability$70 0.2 $75 0.2$75 0.2 $80 0.3$90 0.2 $90 0.4$105 0.2 $100 0.1$110 0.2a. Find the expected cash flow from each apartment complex.b. What is the coefficient of variation for each apartment complex?c. which apartment complex has more risk?

Answer 1

the Palmer Heights apartment has more risk

Step-by-step explanation:

first we need to calculate the expected cash flow for each apartment:

Palmer Heights: =0.2*70+0.2*75+0.2*90+0.2*105+0.2*110

=90

Crenshaw Village: =0.2*75+0.3*80+0.4*90+0.1*100

=85

then is necessary get the coefficient of variation:

Palmer Heights: =sqrt(0.2*(70-90)^2+0.2*(75-90)^2+0.2*(90-90)^2+0.2*(105-90)^2+0.2*(110-90)^2)/90

=0.175682092

Crenshaw Village:

=sqrt(0.2*(75-85)^2+0.3*(80-85)^2+0.4*(90-85)^2+0.1*(100-85)^2)/85

=0.09112902

3.

the Palmer coefficient has a bigger value so we conclude that Palmer Heights has more risk