Podcast
Questions and Answers
What is the effect of financial leverage on business risk?
What is the effect of financial leverage on business risk?
How can a landlord shift risk to tenants?
How can a landlord shift risk to tenants?
Which method can reduce business risk?
Which method can reduce business risk?
Diversification of assets is effective in reducing risk when:
Diversification of assets is effective in reducing risk when:
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What defines financial risk?
What defines financial risk?
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Which statement about shifting risk to tenants is accurate?
Which statement about shifting risk to tenants is accurate?
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What is a characteristic of business risk?
What is a characteristic of business risk?
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Using less financial leverage typically results in:
Using less financial leverage typically results in:
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One way to specifically mitigate financial risk is through:
One way to specifically mitigate financial risk is through:
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Which factor contributes to an increase in business risk?
Which factor contributes to an increase in business risk?
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What is the typical investor attitude toward risk?
What is the typical investor attitude toward risk?
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What distinguishes insurable risk?
What distinguishes insurable risk?
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What do rational risk takers prioritize when investing?
What do rational risk takers prioritize when investing?
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How do credit investigation practices influence business risk?
How do credit investigation practices influence business risk?
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What is one characteristic of insurable risk?
What is one characteristic of insurable risk?
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Study Notes
Business Risk
- Increased by financial leverage
- The likelihood of actual results differing from expectations
- Stems from potential errors in judgment, not just one thing
Landlord Risk Shifting
- Landlords can transfer risk to tenants through various methods:
- Tax stops
- Escalator clauses
- Net leases
- All of the above (correct answer)
Reducing Business Risk
- Diversification reduces overall risk when investment performance of assets is not highly correlated
- Using less financial leverage can help reduce business risk
- Insurance can help mitigate some business risks
Diversification and Risk
- Diversification reduces overall risk when the correlation between investment performance of assets is low
- Diversification is available to all investors
Financial Risk
- Inherent in the use of financial leverage
- Cannot be eliminated by only borrowing on insured loans
- Risk exists irrespective of favorability of leverage
- Financial risk is related to financial leverage, not inversely related
Shifting Risk to Tenants
- Shifting risk to tenants through net leases, tax stops, and rent escalator clauses leads to higher effective gross rents
Factors Increasing Business Risk
- Management inefficiencies
- Credit investigation and rent collection practices
- Economic environment
- All of the above (correct answer)
Investor Attitude Toward Risk
- Investors prefer higher returns for the same level of risk
- Investors prefer lower risk for the same rate of return
- Increased risk leads to expected increases in return
Insurable Risk
- Insurable risk can be transferred to an insurance company
- Insurable risk is not synonymous with business risk or financial risk
- Insurance use does not increase insurable risk
Rational Risk Takers
- Rational risk takers specify investment objectives
- Rational risk takers identify major risks
- Rational risk takers try to eliminate or transfer risk
- All of the above (correct answer)
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Description
Test your knowledge on business risk concepts, including financial leverage, risk transfer methods employed by landlords, and strategies for reducing overall business risk. Explore the importance of diversification in risk management and understand the intricacies of financial risk.
