Question

Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows:

  

Windy Acres			Hillcrest Apartments
Yearly Aftertax Cash Inflow	Probability		Yearly Aftertax Cash Inflow	Probability
$150,000	0.2		$155,000	0.2
155,000	0.2		160,000	0.3
170,000	0.2		170,000	0.4
185,000	0.2		180,000	0.1
190,000	0.2

a. Find the expected value of the cash flow for each apartment complex. (Enter the answers in thousands.)

  

	Expected cash flow
Windy Acres	$
Hillcrest Apartments	$

b. What is the coefficient of variation for each apartment complex? (Do not round intermediate calculations. Round the final answers to 4 decimal places.)

	Coefficient of variation
Windy Acres
Hillcrest Apartments

c. Which apartment complex has more risk?

• Windy Acres

• Hillcrest Apartments

Answer 1

The formula to Standard Devaition is √∑(x-x)^2/n-1

Expected Cash Flow

Windy Acess = 135800

Hill Crest Appartments = 165000

Coefficient of Variation

Windy Access = 0.49 or 49%

Hill Crest Appartments = 0.52 or 52%

Hill crest appartment is at more risk since it has more Coefficient of Variation