Question

GD Properties, LLC is considering investments in two different properties. Investment A will yield 16% in the optimistic scenario, 11% in the most likely scenario, and 7% in the pessimistic scenario. Investment B will yield 21% in the optimistic scenario, 14% in the most likely scenario, and 5% in the pessimistic scenario. There is a 20% chance of occurrence for the pessimistic scenario, a 60% chance for the most likely scenario, and a 20% chance for the optimistic scenario.

a) Compute the expected IRR for each scenario.

b) Compute the variance and standard deviation for each scenario.

c) What investment would you recommend?

Answer 1

a. Investment A

p(x)	return	p*x	p*(x - mean)^2
0.2	16.0%	0.032	0.0004608
0.6	11.0%	0.066	0.0000024
0.2	7.0%	0.014	0.0003528

Exected IRR = 11.20%

variance = 0.000816

standard dev = 2.8566%

Standard dev/expected return = 0.2551

Investment B

p(x)	return	p*x	p*(x - mean)^2
0.2	21.0%	0.042	0.0010952
0.6	14.0%	0.084	0.0000096
0.2	5.0%	0.01	0.0014792

Expected IRR = 13.60%

Variance = 0.002584

standard dev = 5.0833%

Standard dev/ expected return = 0.3738

c) A is better since SD/ expected return is lower