Question 1

Professional money managers have traditionally divided the investment universe into three major long-run investment "asset classes" plus "cash"). Which of the following is not one of these asset classes:

Accepted Answer

Mutual funds are not an asset class; they are investment vehicles that can invest in various asset classes such as stocks, bonds, and real estate.

Question 2

All of the following are advantages of direct ownership of property as a way of investing in real estate except:

Accepted Answer

Direct ownership of property is considered illiquid compared to other forms of investments because it takes more time and effort to sell real estate than to sell stocks or bonds.

Question 3

Which statement is most accurate?

Accepted Answer

Real estate is generally considered a better inflation hedge than Treasury Bills because it tends to appreciate in value over time, often in line with or above inflation rates, whereas Treasury Bills typically offer lower returns that may not keep up with inflation.

Question 4

All of the following are examples of the "savings objective" of investment except:

Accepted Answer

The "savings objective" of investment typically involves setting aside money for future goals or needs, such as buying a house, paying for education, or retirement. Choice D, a 65-year-old planning how to use his wealth to support himself now that he is retired, represents a spending or distribution phase rather than a saving phase, making it the correct answer.

Question 5

The present value of the future sum of $30,000 two years from now, if the opportunity cost of capital is 15% nominal annual rate of return compounded monthly is:

Accepted Answer

The answer of The present value of the future sum...

Question 6

Real estate is approximately what share of the total U.S. investable asset market universe:

Accepted Answer

Real estate represents around a quarter of the total U.S. investable asset market universe, highlighting its significant role in the investment landscape.

Question 7

You expect annual cash flows from a certain property as follows: $\begin{array}{|c|c|} \hline \text { Year 1 } & \$ 20,000 \ \hline \text { Year 2 } & \$ 22,000 \ \hline \text { Year } 3 & \$ 30,000 \ \hline \text { Year } 4 & \$ 31,000 \ \hline \text { Year } 5 & \$ 40,000 \ \hline \end{array}$ In addition, you expect that you can sell the property at the end of the 5^th year for 10 times its expected cash flow that year. If the opportunity cost of capital is 10% per year, then what is the net present value NPV) of a deal in which the investor has to pay $350,000 for the property at the end of Year 0, one year prior to the first cash flow)?

Accepted Answer

The NPV is calculated by discounting all future cash flows and the sale price back to the present value and subtracting the initial investment. The NPV is +$3,282.

Question 8

You expect to have to make a capital improvement expenditure of $50,000 in a property in 5 years. If you can only set aside at most $800 at the end of each month in a sinking fund, and the annual interest in the sinking fund is 6%, then how many months in advance of the 5-year horizon must you begin saving the money?

Accepted Answer

To find the number of months needed, use the future value of an annuity formula. With a monthly deposit of $800, an annual interest rate of 6% (or 0.5% per month), and a target of $50,000, you need approximately 55 months to reach the goal.

Question 9

What is the Present Value of property with has a current year NOI of $100,000, which will grow at 3% per year, and can be discounted at a rate of r=8%?

Accepted Answer

The Present Value (PV) of a property with a Net Operating Income (NOI) that grows at a constant rate can be calculated using the formula: PV = NOI / (r - g), where r is the discount rate and g is the growth rate. Plugging in the given values: PV = $100,000 / (0.08 - 0.03) = $100,000 / 0.05 = $2,000,000.

Question 10

If you have a perpetuity from T=0 valued at PV=$1,000, and the same cash flow stream results in a perpetuity starting from T=3 valued at $500, how much is the annuity from T=0 until T=3 worth, assuming r=10%?

Accepted Answer

The perpetuity from T=0 is valued at $1,000, and the perpetuity starting from T=3 is valued at $500. The difference in present values ($1,000 - $500 = $500) represents the present value of the annuity from T=0 to T=3.

Question 11

All are ways to break up or add up to) the total return except:

Accepted Answer

E) Nominal Return + Real Return is incorrect because the nominal return already includes the real return plus inflation. The other options correctly show ways to break up or add up to the total return by separating different components of return or factors affecting it.

Question 12

Suppose you pay $100,000 for a property today. The property appreciates 8% in the first year, and 12% in the second year. The third year yield was 7%. What was the income generated by the property in year 3?

Accepted Answer

The property's value at the end of the first year is $100,000 * 1.08 = $108,000. At the end of the second year, it's $108,000 * 1.12 = $120,960. The 7% yield in the third year on $120,960 is $120,960 * 0.07 = $8,467.

Question 13

"Liquidity" refers to:

Accepted Answer

Liquidity in financial terms refers to how quickly and easily an asset can be sold or converted into cash without significantly affecting its value. Option E accurately describes this concept, emphasizing the importance of being able to sell an asset quickly and at its full value.

Question 14

What is the present value of a 10-year lease with monthly rental payments of $2000 due at the beginning of each month, if the opportunity cost of capital is 8%?

Accepted Answer

The present value of a lease with payments at the beginning of each period (an annuity due) can be calculated using the formula for the present value of an annuity due: $PV = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right) \times (1 + r)$, where PMT is the payment per period, r is the monthly interest rate, and n is the total number of payments. Given an 8% annual interest rate, the monthly rate is $0.08/12 = 0.0066667$. With 10 years of monthly payments, $n = 10 \times 12 = 120$. Plugging these values into the formula gives the present value of the lease. Calculating directly or using a financial calculator with these inputs will give a value close to $165,942, hence option C is correct.

Question 15

You need to borrow $80,000 for a down-payment on a house. You would like to pay the loan off in 15 years. With 9% interest on the loan, what will be your monthly payment?

Accepted Answer

The answer of You need to borrow $80,000 for a...

Question 16

If yields are quoted at 9.00% in the bond market BEY), then what interest rate must you charge in a monthly-payment mortgage MEY) in order to be able to sell the mortgage at par value in the bond market?

Accepted Answer

The answer of If yields are quoted at 9.00% in...

Question 17

On Dec.31 2006 you buy a property for $1,000,000. On Dec.31 2007 that property yields $100,000 of net cash flow which you take and spend on a New Year's Eve bash. Also on Dec.31 2007 the property is appraised at $1,010,000 in value, but you don't sell it then. On Dec.31 2008 the property yields another $100,000 in net cash flow which you spend on another bash, in part to celebrate the fact that you sold the property that very day for $1,200,000. There are no other cash flows from this investment.
A) What is the simple HPR total return on your investment in this property for the calendar year 2007?
B) What is the simple HPR total return on your investment in this property for the calendar year 2008?
C) What is the annual time-weighted arithmetic mean periodic total return for this property during the two-year period from the beginning of 2007 through the end of 2008?
D) What is the annual time-weighted geometric mean periodic total return for this property during the two-year period from the beginning of 2007 through the end of 2008?
E) What is the IRR per annum) on your investment in this property "cradle-to-grave" that is, over the entire 2-year period you held the property, from purchase to sale)?

Accepted Answer

The answer of On Dec.31 2006 you buy a property...

Question 18

You buy a piece of land for $50,000. You think you will be able to sell it for three times this value in four years. Ignoring any net cash flow while you hold the land, what would be your return on this investment, stated in per annum terms with annual compounding?

Accepted Answer

The answer of You buy a piece of land for...

Question 19

The nominal income return was:

Accepted Answer

The nominal income return is typically expressed as a percentage of the initial investment, and 10% is a common nominal return rate.

Question 20

All of the following are examples of the "income objective" of investment except:

Accepted Answer

The "income objective" of investment focuses on generating regular income from investments, such as interest or dividends, to support current financial needs or obligations. Choices A, B, C, and E all describe scenarios where the goal is to generate ongoing income to meet immediate or short-term financial requirements. In contrast, choice D describes a growth or capital appreciation objective, where the goal is to increase the principal investment over time to reach a future financial goal, such as purchasing a house.

Quiz 3: Central Place Theory and the System of Cities

Professional money managers have traditionally divided the investment universe into three major long-run investment "asset classes" plus "cash") . Which of the following is not one of these asset classes: