Instruction 5-5
There Are Two Houses with Almost Identical Characteristics

question 37

Short Answer

Instruction 5-5
There are two houses with almost identical characteristics available for investment in two different neighbourhoods with drastically different demographic composition.The anticipated gain in value when the houses are sold in 10 years has the following probability distribution:
Returns
$$\begin{array} { | c | c | c | } \hline \text { Probability } & \text { Neighbourhood A } & \text { Neighbourhood B } \\\hline .25 & - \$ 22,500 & \$ 30,500 \\\hline .40 & \$ 10,000 & \$ 25,000 \\\hline .35 & \$ 40,500 & \$ 10,500 \\\hline\end{array}$$
-Referring to Instruction 5-5,if you can invest half of your money on the house in neighbourhood A and the remaining on the house in neighbourhood B,what is the portfolio risk of your investment?

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Definitions:

Fixed Costs

Business expenses that are not affected by changes in the level of production or sales, such as rent and salaries.

Total Variable Costs

The sum of expenses that change directly with the level of output or production volume.

Average Fixed Cost

The total fixed costs of production divided by the number of units produced, indicating cost per unit.

Average Total Costs (ATC)

The total cost of production (fixed plus variable costs) divided by the total quantity of output produced.