Exam 3 Flashcards
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
Common stocks, Real estate, corporate bonds, mortgage-backed securities, municipal bonds, and T-bills
A good analyst first identifies the sources of _
Risk
What does the process of due diligence involve?
Assessing the expected return and discovering features of the property
Due diligence is not usually a _
Risk analysis
Data from a good due diligence can _ a _
Inform, risk analysis
What are the types of risk?
Business, financial, liquidity, management, inflation/interest rate, legislative, environmental
What are factors to consider with business risks?
Lease expiration, vacancy rate, will property be leased?
What are financial risks related to?
The debt coverage ratio
What are liquidity risks to consider?
Are you able to sell the property when you want to?
What are the factors to consider with management risk?
Operating expenses and lease up
What are the factors to consider with inflation and interest rate risk?
Inflation can drive up interest rates and rent, interest-only mortgages, and length of leases
What are the factors to consider with legislative risk?
Rent control, zoning, and tax law
What can be used to model uncertainty or risk?
A sensitivity analysis
What are the types of sensitivity analysis?
Variable by variable, scenarios, and simulations
When you create a variable by variable sensitivity analysis you are doing what?
Creating the data tables like we have done in Excel
When you are creating a scenario sensitivity analysis what does this mean?
You demonstrate the baseline case, best case, and worst case
When you are creating a simulation sensitivity analysis what does this mean?
You allow many variables to vary at random or with pre-determined probability distributions
What is a way to understand uncertainty and risk?
To know how much of the positive cash flows are from NOI vs the sale of the property
The _ the share of positive cash flow that is based on the sale of the property the _ the investment is
Larger, riskier
Rank the order for the riskiest investments when looking at offices, apartments, and hotels starting with the riskiest based on IRR
Hotels, offices, apartments
When you want to calculate the best and worst case scenario sensitivity analysis you must choose the _ that matters the most
Variables (examples include PGI and terminal cap rate)
_ can focus on any number of variables
Simulations
_ are used most when the analyst has _ about the _ of various scenarios
Simulations, no idea, likelihood
Simulations use a _ approach
Randomization
Typically a simulation will calculate _ possible outcomes and generate the _
1,000, average return
_ takes the option to wait to decide to develop or to sell a property seriously
Real option thinking
_ removes many unknown risks
Due diligence
Risks related to the _ or the _ are impossible to eliminate
Business, economy
_ should always be conducted
Sensitivity analyses
_ are as good as the _ you put into them
Simulations, data
Scenario building is _, but not _
Strategic, Essential
This form of sensitivity analysis is pretty easy
Variable by variable
