Question

Assume Carter and his wife buy a vacant parcel of waterfront property at the end of 2011 for $400,000 and expect to be able to sell the property (net of expenses) at the end of 2012 for $415,000. No rental income is generated on the property. Determine the nominal total return and continuously compounded total return, respectively, on this investment over for the holding period.

3.75% and 1.04%

6.25% and 1.04%

3.75% and 3.68%

6.25% and 6.06%

Answer 1

Given,

Value in 2011 = $400000

Value in 2012 = $415000

Solution :-

Nominal total return = (value in 2012 - value in 2011) value in 2011

= ($415000 - $400000) $400000

= $15000 $400000 = 0.0375 or 3.75%

Continuously compounded total return = Log_e(value in 2012 value in 2011)

= Log_e($415000 $400000)

= Log_e(1.0375) = 0.0368 or 3.68%