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
$	150				.2
	155				.2
	170				.2
	185				.2
	190				.2

  

Crenshaw Village
Yearly Aftertax Cash Inflow (in thousands)				Probability
$	155				.2
	160				.3
	170				.4
	180				.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?
  

	Palmer Heights
	Crenshaw Village

Answer 1

Answer a.

Palmer Heights:

Expected Cash Flow = 0.20 * $150 + 0.20 * $155 + 0.20 * $170 + 0.20 * $185 + 0.20 * $190
Expected Cash Flow = $170

Crenshaw Village:

Expected Cash Flow = 0.20 * $155 + 0.30 * $160 + 0.40 * $170 + 0.10 * $180
Expected Cash Flow = $165

Answer b.

Palmer Heights:

Variance = 0.20 * ($150 - $170)^2 + 0.20 * ($155 - $170)^2 + 0.20 * ($170 - $170)^2 + 0.20 * ($185 - $170)^2 + 0.20 * ($190 - $170)^2
Variance = 250

Standard Deviation = (250)^(1/2)
Standard Deviation = $15.81

Coefficient of Variation = Standard Deviation / Expected Cash Flow
Coefficient of Variation = $15.81 / $170
Coefficient of Variation = 0.093

Crenshaw Village:

Variance = 0.20 * ($155 - $165)^2 + 0.30 * ($160 - $165)^2 + 0.40 * ($170 - $165)^2 + 0.10 * ($180 - $165)^2
Variance = 60

Standard Deviation = (60)^(1/2)
Standard Deviation = $7.75

Coefficient of Variation = Standard Deviation / Expected Cash Flow
Coefficient of Variation = $7.75 / $165
Coefficient of Variation = 0.047

Answer c.

Apartment with higher coefficient of variation has more risk.

So, Palmer Heights has more risk.