CFA Level I · CFA Level I Exam · Alternative Investment Performance and Returns
A direct real estate investment was bought for 10.0 million. During the year it produced net operating income of 0.60 million, and the appraised value at year-end was 10.4 million. Ignoring leverage and transaction costs, the total return for the year is closest to:
The total return is about 10.0%. Net operating income of 0.60 million on 10.0 million gives a 6.0% income return, and the rise in appraised value from 10.0 to 10.4 million gives 4.0% appreciation. Adding the two components gives 10.0%.
- A4.0%
- B6.0%
- C10.0%Correct
Explanation
Income return = 0.60/10.0 = 6.0%. Capital appreciation = (10.4 - 10.0)/10.0 = 4.0%. Total return = 6.0% + 4.0% = 10.0%. Choosing 4.0% or 6.0% counts only one component.
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