Peter is a professor of mathematics at State University. His lifetime avocation has been sailing, and he owns an oceangoing sailing vessel. He plans to retire in five years and spend the remainder of his life ‘‘plying'' the South Pacific, visiting exotic ports of call. Accordingly, in five years, he plans to convert all his assets into a single-life annuity that is payable monthly into a bank account which he can access from any- where in the world.

He currently owns four residential lots in Miller Beach that he purchased as an investment in 1978 for $6,000. Peter has received an offer of $140,000 for the lots. He estimates that the lots will appreciate during the next five years at an 11% annual rate.

If he sells the lots, Peter will invest the proceeds in his portfolio of stocks. He invests in growth securities paying negligible dividends that provide their return through appreciation. Peter expects his security portfolio to increase an average of 12% per annum. The risk of real estate in Miller Beach is approximately equal to that of growth stocks.

Peter asks you to evaluate each of the following alternatives and make a recommendation on which course of action he should pursue.

Alternative 1. Sell the beach property now, reinvest the net proceeds in stock, sell the stock in five years, and retire.

Alternative 2. Continue to hold the beach property for another five years, sell the lots, and retire.