Podcast
Questions and Answers
What is the effect of financial leverage on business risk?
What is the effect of financial leverage on business risk?
- It increases business risk. (correct)
- It has no effect on business risk.
- It decreases business risk.
- It eliminates business risk.
How can a landlord shift risk to tenants?
How can a landlord shift risk to tenants?
- By offering lower rent.
- Through equity partnerships.
- With net leases, tax stops, and rent escalator clauses. (correct)
- By providing maintenance services.
Which method can reduce business risk?
Which method can reduce business risk?
- Using only favorable market conditions.
- Employing high financial leverage.
- Insurance. (correct)
- Avoiding all business decisions.
Diversification of assets is effective in reducing risk when:
Diversification of assets is effective in reducing risk when:
What defines financial risk?
What defines financial risk?
Which statement about shifting risk to tenants is accurate?
Which statement about shifting risk to tenants is accurate?
What is a characteristic of business risk?
What is a characteristic of business risk?
Using less financial leverage typically results in:
Using less financial leverage typically results in:
One way to specifically mitigate financial risk is through:
One way to specifically mitigate financial risk is through:
Which factor contributes to an increase in business risk?
Which factor contributes to an increase in business risk?
What is the typical investor attitude toward risk?
What is the typical investor attitude toward risk?
What distinguishes insurable risk?
What distinguishes insurable risk?
What do rational risk takers prioritize when investing?
What do rational risk takers prioritize when investing?
How do credit investigation practices influence business risk?
How do credit investigation practices influence business risk?
What is one characteristic of insurable risk?
What is one characteristic of insurable risk?
Flashcards
What is Business Risk?
What is Business Risk?
The possibility that actual operating results will differ from expected results.
How does financial leverage impact business risk?
How does financial leverage impact business risk?
Using debt financing (loans) can increase business risk because it creates a fixed debt obligation that must be repaid, regardless of business performance.
How can business risk be reduced?
How can business risk be reduced?
Reducing business risk involves minimizing potential deviations from expected operating results.
What are some ways to reduce business risk?
What are some ways to reduce business risk?
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Does diversification always reduce risk?
Does diversification always reduce risk?
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What is Financial Risk?
What is Financial Risk?
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How does financial leverage create financial risk?
How does financial leverage create financial risk?
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How can landlords shift risk to tenants?
How can landlords shift risk to tenants?
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What are some risk shifting strategies?
What are some risk shifting strategies?
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What is the effect of shifting risk to tenants?
What is the effect of shifting risk to tenants?
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Business Risk
Business Risk
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Factors Contributing to Business Risk
Factors Contributing to Business Risk
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Investor Risk Attitude
Investor Risk Attitude
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Risk Aversion
Risk Aversion
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Insurable Risk
Insurable Risk
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Uninsurable Risk
Uninsurable Risk
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Rational Risk Takers
Rational Risk Takers
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Investment Objectives
Investment Objectives
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Risk Mitigation
Risk Mitigation
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Residual Risk
Residual 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.
