There are two houses with almost identical characteristics available for investment in two different neighborhoods with drastically?
different demographic composition. The anticipated gain in value when the houses are sold in 10 years has the following probability distribution:
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Probability Neighborhood A Neighborhood B
.25 $22,500 $30,500
.40 $10,000 $25,000
.35 $40,500 $10,500
a) What is the expected value gain for the house in neighborhood A? Show or explain
b) What is the expected value gain for the house in neighborhood B? Show or explain c) What is the variance of the gain in value for the house in neighborhood A? Show or explain how you obtain your answer.
d) What is the variance of the gain in value for the house in neighborhood B? Show or explain how
e) What is the standard deviation of the value gain for the house in neighborhood A? Show or explain .
f) What is the standard deviation of the value gain for the house in neighborhood B?
g) What is the covariance of the two houses?
h) If you can invest 70% of your money on the house in neighborhood A and the remaining on the house in neighborhood B, what is the portfolio expected return of your investment?
i) If you can invest 70% of your money on the house in neighborhood A and the remaining on the house in neighborhood B, what is the portfolio risk of your investment?
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