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
$	30				0.2
	35				0.2
	50				0.2
	65				0.2
	70				0.2

  

Crenshaw Village
Yearly Aftertax Cash Inflow (in thousands)				Probability
$	35				0.2
	40				0.4
	50				0.2
	60				0.2

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

	Expected Cash Flow (in thousands) Palmer Heights Crenshaw Village

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

	Coefficient of Variation Palmer Heights Crenshaw Village

  
c. Which apartment complex has more risk?

• Palmer Heights

• Crenshaw Village

Answer 1

	Palmer heights					Crenshaw village
	Cash inflow(x)	probability(p)	px	(x-∑px)^2		Cash inflow(x)	probability(p)	px	(x-∑px)^2
	30	0.2	6	400		35	0.2	7	225
	35	0.2	7	225		40	0.4	16	100
	50	0.2	10	0		50	0.2	10	0
	65	0.2	13	225		60	0.2	12	100
	70	0.2	14	400
		Total	50	1250			Total	45	425
	∑px	50				∑px	45
	SD	((x-∑px)^2)^(1/2)				SD	((x-∑px)^2)^(1/2)
	=	1250^(1/2)				=	425^(1/2)
	=	35.36				=	20.62
Ans a	Expected cashflow of Palmer heights is $50 and Crenshaw village is $45
	Palmer heights					Crenshaw village
Ans b	Coefficient of variation=	SD/Mean*100				Coefficient of variation=	SD/Mean*100
	=	35.36/50				=	20.62/45
	=	70.72%				=	45.82%
Ans c	Coefficiant of variation explains the risk in terms of its return.
	So Palmer heights has more risk