Answered

Welcome to Westonci.ca, the ultimate question and answer platform. Get expert answers to your questions quickly and accurately. Connect with a community of experts ready to provide precise solutions to your questions quickly and accurately. Get precise and detailed answers to your questions from a knowledgeable community of experts on our Q&A platform.

You are considering the purchase of real estate that will provide perpetual income that should average $50,000 per year. How much will you pay for the property if you believe its market risk is the same as the market portfolio’s? The T-bill rate is 3%, and the expected market return is 8.0%.

Sagot :

We have to pay for the property if you believe its market risk is the same as the market portfolio’s.
Explanation:
CAPM(Capital Asset Pricing Model) Formula:

We know the risk-free price, return on the market, so beta (as risk on the market is the same as risk in the portfolio, beta is one) so we are trying to plug all the values in order to achieve the expected return of this investment.

We already know that we will get annually, so use the perpetuity formula:

View image charlesries
We hope this information was helpful. Feel free to return anytime for more answers to your questions and concerns. Thanks for using our service. We're always here to provide accurate and up-to-date answers to all your queries. Thank you for visiting Westonci.ca. Stay informed by coming back for more detailed answers.