You are considering the purchase of real estate that will provide perpetual income that should average $55,000 per year.

You are considering the purchase of real estate that will provide perpetual income that should average $55,000 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%, and the expected market return is 11.0%

Expert Solution

Property value = Annual income/Market return

Property value = 55,000/0.11

Property value = $500,000

We are willing to provide $500,000 for the property

Note that we have used the market return not the T-bill rate because the risk of the real estate property is the same as the market portfolio, not T-bill

jeff jeffy answered 2 years ago

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