Question: The real estate investment advisor to the Tired Old Firemen's Pension Fund is faced with a possible property acquisition that will cost $4,200,000. The advisor feels that in one year this property will face the following subjective probabilities. There is a 25% chance for an optimistic scenario or ‘‘upside'' outcome, in which case the property will be worth $5,000,000. There is a 25% chance of a pessimistic scenario or ‘‘downside'' outcome, in which case the property would be worth $3,750,000. And there is a 50% chance of an expected scenario or ‘‘most likely'' outcome, in which case the property will still be worth $4,200,000 next year. Using simple HPRs, compute the following.
a. The expected appreciation return
b. The standard deviation of the possible appreciation return