Question

You are considering the purchase of real estate that will provide perpetual income that should average $50,000 per year. How much will you pay for the property if you believe its market risk is the same as the market portfolio's? The T-bill rate is 5 percent and the expected market return is 12.5 percent.

Answer 1

$400,000

Step-by-step explanation:

The computation of the paying amount is shown below:"

= Average income per year ÷ expected market return

= $50,000 ÷ 12.5%

= $400,000

If we consider that market risk is the same as the market portfolio so we take the 12.5% in the computation part instead of t-bill rate i.e risk-free rate of return 5% as the question is taking about only the market risk