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Questions and Answers
What is the primary purpose of measuring property performance in the investment sector?
Which of the following is correct regarding the capitalisation rate (cap rate)?
How is net operating income (NOI) determined?
What does a profitability index less than 1 indicate?
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What factors are included when calculating the capitalisation rate?
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Why might investors use a cap rate before purchasing a property?
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What does a profitability index of 1 imply about an investment?
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What is the acceptable range for the capitalisation rate considered reasonable for property investments?
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What does a profitability index greater than 1 indicate about a proposed project?
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What is the definition of Internal Rate of Return (IRR)?
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How is the Internal Rate of Return (IRR) related to the attractiveness of a project?
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What does a negative IRR indicate?
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In the context of investment, what does risk refer to?
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Why might a company choose a project with a lower IRR over another project with a higher IRR?
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Which statement best describes the nature of risk in investments?
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If a company invested R20,000 and expects an NPV of R5,000, what is the profitability index?
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Which of the following risks refers specifically to the possibility of financial loss due to a borrower’s failure to repay a loan?
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What is the median of the data set: 5, 7, 9, 10, 12, 15, 20?
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Which of the following is NOT a type of risk mentioned?
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In a normal distribution, where do most values tend to cluster?
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Which measure of central tendency is defined as the average of the data?
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What is the mode of the data set: 2, 3, 3, 5, 6, 7, 7, 7, 8?
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If a dataset consists of an even number of observations, how is the median determined?
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Which term refers to the risk associated with the system as a whole and not just individual entities within it?
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What is standard deviation primarily used to measure in a data set?
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What characterizes a normal distribution curve?
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How does a large standard deviation affect the shape of a bell curve?
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What does the coefficient of variation (CV) measure?
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In a normal distribution, what percentage of data points typically fall within one standard deviation of the mean?
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Which of the following statements is true about a normal distribution?
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What does a small standard deviation suggest about a dataset?
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What is the symbol used to represent standard deviation?
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Study Notes
Property Performance Measurement
- Property performance needs to be measured and monitored to ensure business and property goals are met.
- Property performance should be compared against other property investments and other investment categories (e.g., equity investments).
- Cap Rate is used to evaluate a property investment.
- Cap Rate is calculated as Net operating income / Current market value of the asset.
- Cap Rate helps assess a property's value; the higher the cap rate, the better for the investor.
- Cap Rate is between 5% and 10%.
- Profitability Index is the ratio of payoff to investment of a property investment.
- Profitability Index is calculated as (NPV + initial investment) / initial investment
- Profitability Index allows you to quantify the amount of value created per unit of investment.
- A profitability index of 1 is the lowest acceptable measure.
- IRR is a metric used to estimate the profitability of potential investments.
- IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero.
- IRR is used to evaluate the attractiveness of a project or investment.
- The higher a project's IRR, the more desirable it is to undertake the project.
Investment Risk
- Risk is the chance that an investment's actual return will be different from expected.
- Risk includes the possibility of losing some or all of the original investment.
- Risk can be minimized or negated through diversification, derivatives, and systems that highlight unusual activity.
- Credit Risk is the risk that a borrower will not repay their loan.
- Market Risk is the risk that the value of an investment will decrease due to changes in the market.
- Operational Risk is the risk that an investment will be affected by operational failures.
- Liquidity Risk is the risk that an investment cannot be easily sold or converted to cash.
- Business Risk is the risk that a business will fail or lose money.
- Reputational Risk is the risk that a company's reputation will be damaged.
- Systemic Risk is the risk that an entire system will fail.
- Moral Hazard is the risk that one party to a transaction will take risky action knowing the other party will bear the cost.
Measures of Central Tendency
- Mean is the average of the data.
- Median is the middle value of the ordered data.
- Mode is the value that occurs most often in the data.
- Mean, median, and mode are usually not equal. They are equal when the data is symmetrical.
Normal Distribution
- Normal Distribution represents the distribution of many random variables as a symmetrical bell-shaped graph.
- Normal Distribution is characterized by a symmetrical bell-shaped frequency distribution curve.
- In normal distribution, extremely large values and extremely small values are rare.
- Most frequent values are clustered around the mean.
Standard Deviation
- Standard Deviation quantifies the amount of variation or dispersion of a set of data values.
- Standard Deviation is a measure of how spread out numbers are.
- Standard Deviation is calculated as the square root of the Variance.
- Standard Deviation measures the dispersion of a data set relative to its mean.
- Standard Deviation is often used by investors to measure the risk of a stock or portfolio.
Coefficient of Variance
- Coefficient of Variance is a measure of relative variability.
- Coefficient of Variance is calculated as the ratio of the standard deviation to the mean.
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Description
Test your knowledge on property performance metrics such as Cap Rate, Profitability Index, and IRR, crucial for evaluating property investments. Understand how these tools help in comparing property performances against other investment categories. This quiz will help reinforce your understanding of property investment evaluation.
