You purchase a property today for $5 million One year from now, you expect that a vibrant economy will bring the value of the property to $6 million, while a recession will bring it down to $3 5 million Based on expert opinion, you are convinced that the probability of a vibrant economy is 80 , and that of a recession is 20 Assume that the interest rate is zero for this question (a) Determine the expected return (not in dollar terms ) of this investment and the standard deviation of the return (b) Not many can afford to pay $5 million in one go Suppose you take out a mortgage worth 80 of the purchase price of the property (so that your down payment is 20 ), and that no installment is paid during the first year i What is the value of the property one year from now, net of the value of the mortgage, if the economy is vibrant In recession ii Determine the expected return of this investment and the standard deviation of the return How does this illustrate the effect of financial leveraging (buying asset by borrowing) 4 You purchase a property today for $5 million One year from now, you expect that a vibrant economy will bring the value of the property to $6 million, while a recession will bring it down to $3 5 million Based on expert opinion, you are convinced that the probability of a vibrant economy is 80 , and that of a recession is 20 Assume that the interest rate is zero for this question (a) Determine the expected return (not in dollar terms ) of this investment and the standard deviation of the return (b) Not many can afford to pay $5 million in one go Suppose you take out a mortgage worth 80 of the purchase price of the property (so that your down payment is 20 ), and that no installment is paid during the first year i What is the value of the property one year from now, net of the value of the mortgage, if the economy is vibrant In recession ii Determine the expected return of this investment and the standard devia tion of the return How does this illustrate the effect of financial leveraging (buying asset by borrowing)

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You purchase a property today for $5 million. One year from now, you expect that a vibrant economy will bring the value of the property

You purchase a property today for $5 million. One year from now, you expect that a vibrant economy will bring the value of the property to $6 million, while a recession will bring it down to $3.5 million. Based on expert opinion, you are convinced that the probability of a vibrant economy is 80%, and that of a recession is 20%. Assume that the interest rate is zero for this question.

(a) Determine the expected return (not in dollar terms!) of this investment and the standard deviation of the return. (b) Not many can afford to pay $5 million in one go. Suppose you take out a mortgage worth 80% of the purchase price of the property (so that your down payment is 20%), and that no installment is paid during the first year. i. What is the value of the property one year from now, net of the value of the mortgage, if the economy is vibrant? In recession? ii. Determine the expected return of this investment and the standard deviation of the return. How does this illustrate the effect of financial leveraging (buying asset by borrowing)?

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4. You purchase a property today for $5 million. One year from now, you expect that a vibrant economy will bring the value of the property to $6 million, while a recession will bring it down to $3.5 million. Based on expert opinion, you are convinced that the probability of a vibrant economy is 80%, and that of a recession is 20%. Assume that the interest rate is zero for this question. (a) Determine the expected return (not in dollar terms!) of this investment and the standard deviation of the return. (b) Not many can afford to pay $5 million in one go. Suppose you take out a mortgage worth 80% of the purchase price of the property (so that your down payment is 20%), and that no installment is paid during the first year. i. What is the value of the property one year from now, net of the value of the mortgage, if the economy is vibrant? In recession? ii. Determine the expected return of this investment and the standard devia- tion of the return. How does this illustrate the effect of financial leveraging (buying asset by borrowing)