Question: (25 points) Compute the expected return and standard deviation for the following properties. The current price of each property is $500,000. Which has the better

(25 points) Compute the expected return and standard deviation for the

(25 points) Compute the expected return and standard deviation for the following properties. The current price of each property is $500,000. Which has the better risk-return tradeoff? Property A: Pessimistic: NOI stays flat at $50,000 per year for the next 5 years. Resale price is $500,000 in year 5. Probability = 25%. Most Likely: NOI starts at $50,000 the first year and grows by 1% for the next 5 years. Resale price is $525,000 in year 5. Probability = 50%. Optimistic: NOI starts at $50,000 the first year and grows by 3% for the next 5 years. Resale price is $575,000 in year 5. Probability = 25%. Property B: Pessimistic: NOI starts at $50,000 the first year and decreases by 2% for the next 5 years. Resale price is $475,000 in year 5. Probability = 25%. Most Likely: NOI starts at $50,000 the first year and grows by 1% for the next 5 years. Resale price is $525,000 in year 5. Probability = 50%. Optimistic: NOI starts at $50,000 the first year and grows by 5% for the next 5 years. Resale price is $600,000 in year 5. Probability = 25%. (25 points) Compute the expected return and standard deviation for the following properties. The current price of each property is $500,000. Which has the better risk-return tradeoff? Property A: Pessimistic: NOI stays flat at $50,000 per year for the next 5 years. Resale price is $500,000 in year 5. Probability = 25%. Most Likely: NOI starts at $50,000 the first year and grows by 1% for the next 5 years. Resale price is $525,000 in year 5. Probability = 50%. Optimistic: NOI starts at $50,000 the first year and grows by 3% for the next 5 years. Resale price is $575,000 in year 5. Probability = 25%. Property B: Pessimistic: NOI starts at $50,000 the first year and decreases by 2% for the next 5 years. Resale price is $475,000 in year 5. Probability = 25%. Most Likely: NOI starts at $50,000 the first year and grows by 1% for the next 5 years. Resale price is $525,000 in year 5. Probability = 50%. Optimistic: NOI starts at $50,000 the first year and grows by 5% for the next 5 years. Resale price is $600,000 in year 5. Probability = 25%

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