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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Question: 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?

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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