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Suppose two buildings located in the same city with the exact same NOI recently sold. If...

  1. 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)
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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

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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