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
$	120				0.2
	125				0.2
	140				0.2
	155				0.2
	160				0.2

  

Crenshaw Village
Yearly Aftertax Cash Inflow (in thousands)				Probability
$	125				0.2
	130				0.3
	140				0.4
	150				0.1

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

a. Expected Cash flow from Palmer Complex =0.2*120+0.2*125+0.2*140+0.2*155+0.2*160=140
Expected Cash flow from Crenshaw Village =0.2*125+0.3*130+0.4*140+0.1*150=135

b. Standard Deviation of Palmer Compalex =(0.2*(120-140)^2+0.2*(125-140)^2+0.2*(140-140)^2+0.2*(155-140)^2+0.2*(160-140)^2)^0.5=15.8114 or 15.81
Standard Deviation of Crenshaw Village =(0.2*(125-135)^2+0.3*(130-135)^2+0.4*(140-135)^2+0.1*(150-135)^2)^0.5=7.7460 or 7.75

c.Coefficient of Variation of Palmer Complex =Standard Deviation/Expected return =15.8114/140 =0.11
Coefficient of Variation of Crenshaw Village =Standard Deviation/Expected return =7.7460/135=0.06
Palmer Complex has more risk as it has higher Coefficient of Variation