Question

- Suppose two buildings located in the same city with the exact same NOI recently sold. If one sold at a capitalization rate of 11% while the other sold at 6.5%, which of the two projects do you think is a riskier investment? Briefly explain why. (10 pts)

Answer #1

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Risk- Return (or Rate) Relationship:

There is a direct relationship between the risk associated and the
return gained.

As per Risk-Return (or Rate) Relationship: The higher the risk associated in the project, the higher the chances of gains (or losses) i.e Return and vice-versa.

Hence If the net operating income is the same and if the capitalisation rate is higher, it means it is risky.

Hence project with a capitalisation rate of 11% is more risker project.

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