Exam 3

Question 1

List the highest potential investments for returns when looking at the risk and return across investments. Start with the riskiest investments aka the investments with the highest potential terms

Answer 1

Common stocks, Real estate, corporate bonds, mortgage-backed securities, municipal bonds, and T-bills

Question 2

A good analyst first identifies the sources of _

Answer 2

Risk

Question 3

What does the process of due diligence involve?

Answer 3

Assessing the expected return and discovering features of the property

Question 4

Due diligence is not usually a _

Answer 4

Risk analysis

Question 5

Data from a good due diligence can _ a _

Answer 5

Inform, risk analysis

Question 6

What are the types of risk?

Answer 6

Business, financial, liquidity, management, inflation/interest rate, legislative, environmental

Question 7

What are factors to consider with business risks?

Answer 7

Lease expiration, vacancy rate, will property be leased?

Question 8

What are financial risks related to?

Answer 8

The debt coverage ratio

Question 9

What are liquidity risks to consider?

Answer 9

Are you able to sell the property when you want to?

Question 10

What are the factors to consider with management risk?

Answer 10

Operating expenses and lease up

Question 11

What are the factors to consider with inflation and interest rate risk?

Answer 11

Inflation can drive up interest rates and rent, interest-only mortgages, and length of leases

Question 12

What are the factors to consider with legislative risk?

Answer 12

Rent control, zoning, and tax law

Question 13

What can be used to model uncertainty or risk?

Answer 13

A sensitivity analysis

Question 14

What are the types of sensitivity analysis?

Answer 14

Variable by variable, scenarios, and simulations

Question 15

When you create a variable by variable sensitivity analysis you are doing what?

Answer 15

Creating the data tables like we have done in Excel

Question 16

When you are creating a scenario sensitivity analysis what does this mean?

Answer 16

You demonstrate the baseline case, best case, and worst case

Question 17

When you are creating a simulation sensitivity analysis what does this mean?

Answer 17

You allow many variables to vary at random or with pre-determined probability distributions

Question 18

What is a way to understand uncertainty and risk?

Answer 18

To know how much of the positive cash flows are from NOI vs the sale of the property

Question 19

The _ the share of positive cash flow that is based on the sale of the property the _ the investment is

Answer 19

Larger, riskier

Question 20

Rank the order for the riskiest investments when looking at offices, apartments, and hotels starting with the riskiest based on IRR

Answer 20

Hotels, offices, apartments

Question 21

When you want to calculate the best and worst case scenario sensitivity analysis you must choose the _ that matters the most

Answer 21

Variables (examples include PGI and terminal cap rate)

Question 22

_ can focus on any number of variables

Answer 22

Simulations

Question 23

_ are used most when the analyst has _ about the _ of various scenarios

Answer 23

Simulations, no idea, likelihood

Question 24

Simulations use a _ approach

Answer 24

Randomization

Question 25

Typically a simulation will calculate _ possible outcomes and generate the _

Answer 25

1,000, average return

Question 26

_ takes the option to wait to decide to develop or to sell a property seriously

Answer 26

Real option thinking

Question 27

_ removes many unknown risks

Answer 27

Due diligence

Question 28

Risks related to the _ or the _ are impossible to eliminate

Answer 28

Business, economy

Question 29

_ should always be conducted

Answer 29

Sensitivity analyses

Question 30

_ are as good as the _ you put into them

Answer 30

Simulations, data

Question 31

Scenario building is _, but not _

Answer 31

Strategic, Essential

Question 32

This form of sensitivity analysis is pretty easy

Answer 32

Variable by variable