Reference no: EM131734244

Question: Consider two assets: an apartment building in town and a raw land parcel on the fringe of the metropolitan area. Assume the raw land produces no income but owes 1% of its value per year in property taxes, while the apartment has a current yield (cap rate) of 8%. Assume also that the value of the raw land is more risky than that of the apartment building. Which of these two assets is likely to have a higher appreciation return component? Why? Now prove (using simple algebra and basic investment economic logic) that the raw land must have an ex ante expected appreciation rate at least 9% greater than that of the apartment building.