GD Properties, LLC is considering investments in two different properties. Inves

Question

GD Properties, LLC is considering investments in two different properties. Investment A will yield 16% in the optimistic scenario, 11% in the most likely scenario, and 7% in the pessimistic scenario. Investment B will yield 21% in the optimistic scenario, 14% in the most likely scenario, and 5% in the pessimistic scenario. There is a 20% chance of occurrence for the pessimistic scenario, a 60% chance for the most likely scenario, and a 20% chance for the optimistic scenario.

a) Compute the expected IRR for each scenario.

b) Compute the variance and standard deviation for each scenario.

c) What investment would you recommend?

Explanation / Answer

a. Investment A

Exected IRR = 11.20%

variance = 0.000816

standard dev = 2.8566%

Standard dev/expected return = 0.2551

Investment B

Expected IRR = 13.60%

Variance = 0.002584

standard dev = 5.0833%

Standard dev/ expected return = 0.3738

c) A is better since SD/ expected return is lower

p(x) return p*x p*(x - mean)^2 0.2 16.0% 0.032 0.0004608 0.6 11.0% 0.066 0.0000024 0.2 7.0% 0.014 0.0003528

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.