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%.

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03-06-2022
Business

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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%.

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charlesries charlesries · Answer 1 · 2022-06-03T04:18:39+02:00

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: