Karen owns a condo that she rents out for short periods of time using an app that connects visitors who need a temporary place to stay to those who have a place to rent out. Karen's return from renting out the condo is a random variable that depends on the number of local events that attract tourists and other visitors to her area. The market value of the condo is $245,000.00, and the expected return from renting it out is $23,000.00, with a standard deviation $5,000.00. That standard deviation in the return is generated exclusively by variations in the number of local events. Every local event above average for the year means an extra $1,000 in profit for Karen, while a below average number of events reduces Karen's profits by $1,000 per event.

Karen has another $245,000.00 that she wants to invest in buying a second condo to rent out. She faces two options.

PART 1

Karen's first option is to buy a condo in an area with a guaranteed rate of visitors thanks to a set number of annual events. This condo would yield an expected return of $23,000.00 each year, with a standard deviation of $0.

What is Karen's expected rate of return on her total investment if she buys this condo? ______ %

What is the standard deviation of her rate of return in this case? ______ %

PART 2

Karen's second option is to buy a condo in a nearby town that competes with hers for local events. Whenever the town where her original condo is located loses a local event, that event relocates to this other nearby town, and vice versa. Thus, when her town gains an extra local event and her original investment sees a $1,000 higher return, this second condo would see a $1,000 lower return. And when her town hosts one fewer local event and her original investment sees a $1,000 lower return, this second condo would see a $1,000 higher return.

This second condo also costs $245,000.00 and has an expected annual return of $23,000.00. If Karen buys this second condo instead of the one in the previous part, what will be her expected rate of return for her total investment? ______ %

What is the standard deviation of the rate of return on her total investment in this case? ______ %

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PART 1 1 Karens expected rate of return on her total inves... View the full answer