Deck 20: Investments in Real Assets

Question 1

The value of the comparable sales approach to real estate valuation is that it is highly theoretical.

Answer 1

False
Explanation: The comparable sales approach to real estate valuation is highly practical or actual, not highly theoretical.

Question 2

Under some mortgage arrangements, the lender may loan the funds at a rate well below the current market rate.

Answer 2

True
Explanation: Under some mortgage arrangements, the lender may loan the funds at a rate well below the current market rate. An example is ARMs.

Question 3

There is often a place for real assets in a truly diversified portfolio.

Answer 3

True
Explanation: We know from Chapter 17 on portfolio theory that whenever we can add an asset to a portfolio with a correlation of less than 1, we can reduce the risk of that portfolio and perhaps increase the portfolio return. In this case, because REITs have the second-highest return, we can be sure that real estate's addition to the portfolio will raise the portfolio return.

Question 4

Real estate investment trusts provide a large, liquid investment alternative to small investors.

Question 5

REITs are very similar to mutual funds or investment companies.

Question 6

In a real estate syndicate, a general partner has limited liability.

Question 7

The value of real assets moves closely with the value of financial assets, and therefore they provide effective portfolio diversification.

Question 8

A problem with real estate investments is that all require direct management by the owner.

Question 9

The only tax benefit for real estate owners is depreciation allowances.

Question 10

While providing an effective hedge against inflation, real assets do not have particularly efficient liquid markets.

Question 11

Twin factors that make real estate an attractive investment are tax write-offs and appreciation from inflation.

Question 12

The time period over which real estate is financed is almost always the same period over which depreciation is taken.

Question 13

Movements between various real and monetary assets are less positively correlated than those for monetary assets alone.

Question 14

Dealer spreads on real assets tend to be less than on stocks or bonds.

Question 15

A variable-rate mortgage allows the borrower to select a different rate of interest depending on economic conditions.

Question 16

The prices of gold and silver tend to be positively correlated with the stock market.

Question 17

The price of diamonds around the world is controlled not by economic factors, but by one monopolistic company.

Question 18

A major advantage of real estate over other real assets is its liquidity.

Question 19

Evidence shows real assets to be an inflation hedge.

Question 20

Under a graduated payment mortgage, annual payments are adjusted based on the new existing interest rate.

Question 21

Compared to other investments, which of the following is not a disadvantage of investing in real assets?

A)The initial amount of money is usually large
B)The absence of a relatively efficient, liquid market
C)High transaction and incidental costs
D)All of the above are disadvantages

Question 22

Limited liability is particularly important in real estate because mortgage debt obligations may exceed the net worth of participants.

Question 23

No one in a limited partnership arrangement has unlimited liability.

Question 24

Real assets often increase in value when:

A)higher levels of inflation are anticipated.
B)the stock market is advancing.
C)the public is confident about world events.
D)bond prices are advancing.

Question 25

Collectible items are considered to be real assets.

Question 26

Graduated payment mortgages may require payment of interest on accumulated, unpaid interest.

Question 27

The negative impact of tax reform on real estate was partly associated with declining economic conditions in various sections of the country during the late 1980s and early 1990s.

Question 28

Perhaps the largest disadvantage of real assets is the absence of large, liquid, and relatively efficient markets.

Question 29

Real estate is a particularly good investment among real assets because of:

A)depreciation write-offs.
B)appreciation in value due to price appreciation.
C)long-term financing.
D)All of the above

Question 30

A shared appreciation mortgage usually has an interest rate below current market rates.

Question 31

In a blind pool arrangement, funds are provided to the general partner to select properties for investment.

Question 32

Under an equity participation arrangement, the lender not only provides the borrowed capital, but part of the equity ownership funds as well.

Question 33

A limited partnership can be either private or public in nature.

Question 34

Diamonds have enjoyed an enviable record of no price declines over the past few years.

Question 35

Real assets may offer an opportunity as an inflation hedge because inflation means higher replacement costs for real estate, precious metals, and other physical items.

Question 36

Depreciation

A)on residential real estate property can be written off over 31 1/2 years.
B)on commercial real estate can be written off over 39 years.
C)can be accelerated for commercial real estate.
D)None of the above

Question 37

Real assets may be effective for portfolio diversification because:

A)they provide an effective hedge against deflation.
B)they are perceived as a safe haven for investments.
C)real and financial assets are less positively correlated than financial assets alone.
D)None of the above

Question 38

Silver has more industrial and commercial uses than gold.

Question 39

A negative aspect of diamond investments is the relatively high cost of buying and selling them.

Question 40

Gold ownership is considered a hedge against inflation.

Question 41

Which of the following is NOT a characteristic of real estate investment trusts?

A)Similar to mutual funds, they pool investor funds and invest directly in real estate or make construction or mortgage loans
B)They provide a tax shelter to wealthy investors
C)It is the most liquid type of real estate investment
D)All of the above are characteristics of REITs

Question 42

Which of the following allow the individual to invest in gold without actually owning gold?

A)Gold stock
B)Gold futures
C)Options on gold futures
D)All of the above

Question 43

In recent times, suppliers of second mortgages have often been:

A)buyers of real estate.
B)Real Estate Investment Trusts (REITs).
C)sellers of real estate.
D)real estate brokers.

Question 44

In a(n) ____ arrangement, the borrower may end up making payments to cover not only the loan amortization, but also interest on deferred interest from an earlier period.

A)Graduated payment mortgage
B)Shared appreciation mortgage
C)Adjustable-rate mortgage
D)More than one of the above

Question 45

The gold coin that trades at the smallest premium over its pure bullion value is:

A)gold bullion coins.
B)common date gold coins.
C)old and rare coins.
D)the American double eagle.

Question 46

Which is not an approach to real estate valuation?

A)Cost approach
B)Comparative sales value
C)Price-earnings ratio
D)Income approach

Question 47

Equity participation:

A)is popular in commercial real estate.
B)lets the lender provide borrowed capital.
C)lets the lender provide part of the equity or ownership funds.
D)All of the above

Question 48

Real estate investment trusts are similar to mutual funds or investment companies because:

A)they do not trade on organized exchanges, but do trade over-the-counter.
B)they pool investors' funds.
C)they are both limited partnerships.
D)All of the above

Question 49

Real assets in comparison to financial assets are more likely to produce:

A)superior returns.
B)high liquidity.
C)psychic pleasure.
D)deflationary benefits.

Question 50

Historically, the best time to buy gold and silver is:

A)when the stock market is declining.
B)when there is significant political instability or anticipation of war.
C)during periods of high inflation.
D)All of the above

Question 51

Which of the following statements is NOT true?

A)Like gold, silver is a good hedge against inflation
B)Silver has extensive industrial and commercial uses
C)The supply of silver immediately increases with the price of silver
D)All of the above are true

Question 52

Which of the following is a disadvantage of a regular partnership investment arrangement?

A)It is the simplest legal arrangement
B)There is a well-defined center of responsibility
C)The liability of each investor is not limited to his or her investment
D)All of the above are advantages

Question 53

In evaluating a general partner of a limited partnership, an investor should be sensitive to his or her:

A)experience.
B)possible lawsuits.
C)law degree.
D)A and B

Question 54

Real assets are:

A)tangible assets that may be seen, felt, held, or collected.
B)paper assets that are usually traded over an exchange.
C)also known as financial assets.
D)not diversifiable.

Question 55

The best time to buy collectibles such as art, antiques, musical instruments, and the like is when:

A)the stock market is down.
B)no one else seems very interested.
C)a period of high inflation begins to level off.
D)None of the above

Question 56

Advantages of real assets over other types of investments include that:

A)they provide a good hedge against inflation.
B)they tend to be negatively correlated with other types of investments.
C)they provide personal pleasure to the investor.
D)More than one of the above

Question 57

The most significant advantage(s) of limited partnerships is(are):

A)limited liability of limited partners, and direct assignment of profits and losses to the partners.
B)unlimited liability of general partners.
C)favorable tax treatment of capital gains and management participation features.
D)None of the above

Question 58

Disadvantages of owning diamonds include all of the following EXCEPT:

A)they are very expensive to store and insure.
B)there are usually high dealer mark ups.
C)they are lightweight and easily transported.
D)there is a lack of liquidity.

Question 59

Which of the following is not a real asset?

A)Mickey Mantle baseball card
B)100 shares of an REIT
C)Gold bullion
D)An apartment complex

Question 60

A real estate loan that brings in a new lender is the:

A)adjustable rate mortgage.
B)graduate payment mortgage.
C)second mortgage.
D)None of the above

Question 61

Common date gold coins may trade at ________ their pure bullion value.

A)50-75% of
B)100% of
C)2 to 3 times
D)50 to 100 times

Question 62

The best time to buy collectibles is when:

A)the bloom is off the market and dealers are overburdened with inventory.
B)there is a weekly story in The Wall Street Journal or BusinessWeek about fortunes being made in the collectible market.
C)the economic outlook is moving from inflation to deflation.
D)the economy is at a peak, headed for a downturn.

Question 63

A shopping center has annual net operating income of $1,050,000 and a capitalization rate of 8%. What is its value?