Question 1

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.

Accepted Answer

A higher standard deviation indicates greater volatility or risk, so whether a property with higher return and higher standard deviation is preferable depends on the investor's risk tolerance.

Question 2

Percentage rent is common in office building leases.

Accepted Answer

Percentage rent is more commonly found in retail leases, where a tenant pays a base rent plus a percentage of their sales.

Question 3

In general,investors are assumed to be risk seekers who must be compensated more for the higher risk of some investments.

Accepted Answer

In general, investors are assumed to be risk-averse, meaning they require higher returns as compensation for taking on higher risk investments.

Question 4

Real estate is generally dramatically affected by inflation risk.

Accepted Answer

The answer of Real estate is generally dramatically affected by...

Question 5

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

Accepted Answer

The most common risk measure is volatility, typically calculated as the standard deviation of returns, not the range of returns.

Question 6

Consider an investment in which a developer plans to begin construction,of a building that will cost $1,000,000,in one year if,at that point,rent levels make construction feasible.There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000.Using the traditional approach,which is similar to the "highest and best use" approach,what will the land value of the property be at the completion of the construction,assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)?
A)$120,000
B)$200,000
C)$300,000
D)$833,333

Accepted Answer

The expected NOI is the average of the two possible outcomes: (0.5 * $160,000) + (0.5 * $80,000) = $120,000. The land value is calculated by capitalizing the expected NOI at the cap rate: $120,000 / 0.10 = $1,200,000. Subtract the construction cost of $1,000,000 to find the land value: $1,200,000 - $1,000,000 = $200,000.

Question 7

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

Accepted Answer

Financial risk encompasses a broader range of possibilities, including market volatility, credit default, and other factors that can affect the value of investments or the ability of an individual or institution to meet their financial obligations. Interest rate changes are one potential source of financial risk, but they do not encompass the entirety of the concept.

Question 8

Consider an investment in which a developer plans to begin construction,of a building that will cost $1,000,000,in one year if,at that point,rent levels make construction feasible.There is a 50 percent chance that NOI will be $160,000 and a 50 percent chance that NOI will be $80,000.Assuming a cap rate of 10 percent (12 percent discount rate and an NOI growth rate of 2 percent)what would the land value be at the completion of the construction,under the real options approach?
A)$120,000
B)$200,000
C)$300,000
D)$833,333

Accepted Answer

The answer of Consider an investment in which a developer...

Question 9

Consider two investments: Investment 1 has a 50% chance of producing a return of zero and a 50% chance of producing a return of 40%
Investment 2 has a 50% chance of producing a return of 10% and a 50% chance of producing a return of 30%
Which of the following statements regarding the investments is TRUE?
A)Investment 1 is riskier than Investment 2
B)Investment 2 is riskier than Investment 1
C)Investment 1 and Investment 2 have the same amount of risk
D)Investment 1 is a better investment because it has the potential to produce the highest returns

Accepted Answer

Investment 1 is riskier than Investment 2 because it has a 50% chance of producing a return of zero, which means there's a significant chance of not getting any return at all, whereas Investment 2 offers a return in both scenarios, making it less risky.

Question 10

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

Accepted Answer

Real estate is a tangible asset that has inherent value and can generate income, which makes it less risky than stocks. However, it can still be affected by market fluctuations and economic conditions, making it riskier than bonds.

Question 11

Partitioning the internal rate of return is useful because it helps the investor to determine how much of the return is from annual operating cash flow and how much is from the projected resale cash flow.

Accepted Answer

Partitioning the internal rate of return helps the investor to separate and identify the different components of the return, such as annual operating cash flow and projected resale cash flow. This can provide valuable insights into the sources of the return and help the investor to make better decisions about the investment.

Question 12

Real estate that is not leveraged is not affected by interest rate risk.

Accepted Answer

Real estate that is not leveraged can still be affected by interest rate risk because changes in interest rates can influence property values and the overall demand in the real estate market.

Question 13

Use of leverage always increases the amount of business risk.

Accepted Answer

Leverage involves using borrowed funds or debt to finance investments. While this can increase potential returns, it also increases the level of financial risk for the business. If the business is unable to generate enough revenue to cover its debt payments, it may face financial difficulty or even bankruptcy. Therefore, the use of leverage always increases the amount of business risk.

Question 14

When an investor performs an investigation while considering acquisition of a property,this is referred to as:
A)Investigation
B)Risk analysis
C)Due diligence
D)Acquisition analysis

Accepted Answer

Due diligence is the process of investigating and assessing a property by an investor before acquiring it. It includes evaluating the property's financial, legal, and physical aspects to identify potential risks and opportunities. This investigation helps the investor to make an informed investment decision and mitigate any potential risks. Therefore, due diligence is the appropriate term for this process.

Question 15

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

Accepted Answer

Due diligence refers to conducting a thorough investigation of a property before making a purchase to ensure that there are no hidden risks or problems that could affect the investment.

Question 16

Financial risk increases as the amount of debt increases.

Accepted Answer

This is because the higher the amount of debt, the higher the interest payments that need to be made, and the higher the risk of default. This can lead to credit downgrades, increased interest rates, and ultimately bankruptcy.

Question 17

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

Accepted Answer

Landowners have the option to develop their land or not, which can affect the value and use of the land.

Question 18

Which of the following is NOT a component of lease rollover risk?
A)Commissions paid to a leasing agent to find a new tenant
B)Costs of tenant improvements demanded by new tenants
C)Liquidity risk
D)Reduced revenues from vacancy until a new tenant is found

Accepted Answer

Lease rollover risk typically refers to the risk that a commercial property owner will face difficulties in finding a new tenant when the current lease expires, potentially resulting in extended vacancy periods and reduced rental income. Commissions paid to a leasing agent, tenant improvement costs, and reduced revenues from vacancy are all components of lease rollover risk. Liquidity risk, on the other hand, is a separate type of risk that refers to the risk of being unable to meet financial obligations due to a lack of cash or easily marketable assets.

Question 19

Risk due to potential tax law changes is referred to as:
A)Business risk
B)Financial risk
C)Legislative risk
D)Tax risk

Accepted Answer

Legislative risk refers to the risk associated with changes in laws or regulations that may affect the operations or financial position of a company. In this case, potential tax law changes can impact a company's financial position, making legislative risk the most appropriate choice. Business risk is the risk associated with the industry or market in which a company operates, financial risk is the risk associated with a company's financial structure, and tax risk refers to the risk of facing penalties or legal action from tax authorities.

Question 20

Consider risk-return characteristics of Investments A-D,given above.Which of the following statements is TRUE?
A)Investment C is preferred to Investment D
B)Investment D is preferred over all other investments
C)Investment A is preferred to Investment B
D)Investment B is preferred to Investment C

Accepted Answer

The answer of  Consider risk-return characteristics of Investments A-D,given...

Quiz 13: Risk Analysis