Consider the Following Situation in Which the Market's Expected Return $\quad$

question 10

Multiple Choice

Consider the following situation in which the market's expected return to investment in vacant land is 15% per annum:
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ HBU:
$\begin{array}{lcc} & \text { Today } & \text { Next Yr. } \\ & \text { known) } & \text { expected) } \\\text { Value of Completed Built Property }& \$ 500 & \$ 540 \\ \text { Constr \& Dvlpt Cost exclu land) } & \$ 400 & \$ 420 \\ \text { NPV immediate construction) }& \$ 100 & \$ 120\end{array}$



-In the above situation,

• A) The option premium is due purely to the "growth premium".
• B) The option premium is due purely to the "irreversibility premium".
• C) The option premium is due neither to the "growth premium" nor the "irreversibility premium".
• D) There is no "option premium".

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Definitions:

Continuously Compounded

Refers to the mathematical limit where the frequency of compounding interest reaches infinity over a defined period, leading to the maximal possible growth.

Rate Of Return

The reward or penalty on an investment concluded over a chosen length of time, denoted as a percentage of the investment's initial outlay.

Triple

In finance, this term is not clearly defined without additional context; however, in credit ratings, a 'Triple A' rating signifies the highest credit quality.

Annual Rate Of Return

The percentage change in the value of an investment over a one-year period, taking into account both capital gains and dividends.