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

question 6

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 expected return of your investment?

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Definitions:

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan remaining.

Basic Formula

Typically refers to the accounting equation: Assets = Liabilities + Equity.

Calculating Interest

The process of determining the monetary charge for borrowing money or the return on investment for savings, typically through a predetermined formula.

Note Receivable

A written promise for the payment of a specified amount of money at a set time to the holder or bearer of the note.