Deck 13: Risk Analysis

Question 1

Which of the following best describes the process of "partitioning the IRR"?

A) Dividing the IRR into income and appreciation components.
B) Using the IRR as a discount rate and determining how much of the present value comes from income and resale.
C) Dividing the IRR into before-tax and after-tax IRRs.
D) Determining how much of the IRR comes from each property in a portfolio.

Answer 1

Using the IRR as a discount rate and determining how much of the present value comes from income and resale.

Question 2

Renewal probabilities related to a lease renewal can affect which of the following:

A) Market rent paid after the existing lease ends
B) Vacancy after the existing lease ends.
C) Leasing commissions paid after the existing lease ends
D) All of the above

Answer 2

All of the above

Question 3

Use of leverage always increases the amount of risk.

Answer 3

True

Question 4

Examples of real options includes:

A) Valuation of vacant land
B) Valuation of projects with phases of development
C) Valuation of a building that can be renovated
D) All of the above

Question 5

When an investor does an investigation when considering acquisition of a property,this is referred to as:

A) Investigation
B) Risk analysis
C) Due diligence
D) Acquisition analysis

Question 6

The renewal probability is assumed to be 60% for a particular lease with 12 months vacant if the lease is not renewed.The expected vacancy at the end of the lease is:

A) 4.8months
B) 7.2months
C) 9.0months
D) 12.0 months

Question 7

Land can be viewed as having an "option" to develop the land.

Question 8

The term "financial risk" refers to the probability of interest rates changing.

Question 9

Real estate that is not leveraged does not have interest rate risk.

Question 10

Risk due to potential tax law changes is referred to as:

A) Business risk
B) Financial risk
C) Legislative risk
D) Tax risk

Question 11

When sales exceed a breakpoint sales volume in a retail lease with percentage rent,the additional rent is referred to as:

A) Retail rent
B) Participation rent
C) Overage rent
D) Sales rent

Question 12

Percentage rent is common in office building leases.

Question 13

Real estate has a lot of inflation risk.

Question 14

A property with a higher standard deviation and a higher return is preferable to a property with a lower standard deviation and a lower return.

Question 15

An investor is analyzing the risk of a possible investment by producing three different scenarios.Under a pessimistic scenario,the property would produce a BTIRRp of 8%;a most-likely scenario produces a BTIRRp of 12%.The investor assigns the pessimistic scenario a 25% chance of occurring,the most-likely case a 60% chance of occurring and the optimistic scenario a 15% chance of occurring.What is the standard deviation of the returns?

A) 0.01249
B) 0.0090
C) 0.000156
D) 0.0949

Question 16

The range of returns (highest to lowest)is the most common risk measure.

Question 17

The term "due diligence" refers to doing an investigation before buying a property.

Question 18

Which of the following best describes valuing land as a "real option"?

A) The land value reflects the fact that the developer can wait to decide whether to construct a building on the site.
B) The seller provides the investor with an option to purchase the land at a specific price before a certain date.
C) The land is valued at its most probable use.
D) The seller has an options to repurchase the land from the buyer before construction takes place.

Question 19

In general,real estate is usually considered more risky than bonds but less risky than stocks.

Question 20

Which of the following risks refers to the risk to real estate investors stemming from changes in general economic conditions?

A) Financial risk
B) Liquidity risk
C) Environmental risk
D) Business risk