Question

True of False

10. You are playing a fair gamble with your initial wealth $1,000,000. The expected return of each play of the gamble is 0% since it is a fair gamble. If you try to play this fair gamble 100,000 times, the probability that your wealth after the gambles is higher than your initial wealth is 50% since it is a fair gamble. Assume you bet the same fixed amount at each play and you are not allowed to borrow money.

11. You have $1 million and want to invest in in the real estate market. There are two types of condos. Type A is $0.5 million while Type B is $1 million. If you expect the rent will increase by 50% permanently for both types of condos next year (and the current price does not reflect it), you must buy two Type A condos rather than one Type B condo to maximize your investment return

Answer 1

10. FALSE

In a fair gamble played many times, your number of wins is approximately same as number of losses. So, on a net basis, you neither win nor lose. Hence, your expected wealth remains same as at the start of the game. Hence, the given probability of 50% chance of wealth being more than that at start is wrong.

11. FALSE

Nothing can be said for sure unless we know the current rent on each of the two types of the condos. We are also not aware of the capitalization rate, whether they are same or different for the two types of condos. Hence the given statement is FALSE.