An investor is considering a short-term investment in a resort property on a Car

Question

An investor is considering a short-term investment in a resort property on a Caribbean island.  If the weather is reasonably stable over the next year, the value of the investment is expected to be $1.2 million; however, if this proves to be aheavy hurricane year, the value is expected to be $0.5 million.  According to the experts, there is a 40% chance that this will be a year of many hurricanes.

Refer to the information above.  If this investment is purchased for its fair market value, what is the expected return if the weather is stable?  Round your answer to the nearest tenth of a percent.

30.4%

62.4%

41.2%

none of the above.

30.4%

62.4%

41.2%

none of the above.

Explanation / Answer

Market Value of the investment=0.4*0.5+0.6*1.2=0.92 million

Expected return=1.2/0.92-1=30.4%

Option A

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