Question

ETHICS PROBLEM Samantha Fong sold her home in San Francisco in 2017 for $1.5 million, which was the median home price for that city. Samantha had lived in that house for 17 years, having purchased it from Michael Shoven in 2000 for $545,000. What average annual rate of return did Samantha earn on her home, ignoring things such as property taxes and the costs of maintaining the home? Would you say that Samantha somehow “swindled” Michael? Would your answer to that question be influenced by the knowledge that from 2000 to 2017, the average annual return on U.S. stocks was a little less than 6%?

Answer 1

Part (a)

Annual Rate of Return = 10.31%(Approx.)

Part(b)

No, We would not say that Samantha swindled Michael as the property rate will definitely increase in 17 years. This is because of many factors like:

1. Development of city

2. Increase in inflation each year.

3. The decrease in value of the Dollar from the Year 2000 to 2017 (like if a Pen can be purchased for $1 in Year 2000, it cannot be purchased For $1 in Year 2017)

and so on.

Further, Samantha sold the property at the median rate of the city that means it is totally genuine transaction.

part (c)

US stocks increase by an average rate of 6% (Approx.) from the Year 2000 to Year 2017. but Samantha earns around 10.31% return in these years. Still, this is not a sufficient reason to say that Samantha swindled Michael as property rate depends on various factors prevailing at that time, some of them are mentioned above also.

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