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1.2 What is Sensitivity Analysis ✅

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Questions and Answers

What is the purpose of sensitivity analysis in real estate investments?

To predict future market trends
To calculate the initial investment required
To identify and evaluate the impact of risks on returns (correct)
To determine the tax implications of the investment

Why is it important to evaluate the impact of risks in real estate investments?

To estimate the potential profit margin
To prioritize which risks need to be mitigated (correct)
To negotiate the terms of the investment deal
To comply with legal regulations

What is a key consideration in determining whether a risk is significant in real estate investments?

The potential occurrence of the risk
The reputation of the investment firm
The impact of the risk on investment returns (correct)
The likelihood of legal disputes

How does sensitivity analysis help in risk management for real estate investments?

By evaluating the impact of different risks on investment returns (D) Signup and view all the answers

What is the primary focus of sensitivity analysis within a real estate cash flow model?

To assess the impact of changing risky assumptions on returns (C) Signup and view all the answers

What role does sensitivity analysis play in decision-making for real estate investments?

Prioritizing risks for mitigation or pricing (A) Signup and view all the answers

In the context of real estate investments, what is the significance of evaluating the impact of risks using sensitivity analysis?

To differentiate between manageable and unmanageable risks (A) Signup and view all the answers

What is the relationship between sensitivity analysis and mitigating risks in real estate investments?

Sensitivity analysis guides the prioritization of risks for mitigation (B) Signup and view all the answers

How does sensitivity analysis contribute to effective risk pricing in real estate investments?

By quantifying the impact of risks on investment returns (B) Signup and view all the answers

What is the primary focus of sensitivity analysis in a real estate cash flow model?

To assess the impact of changing market risks on returns (A) Signup and view all the answers

What is the relationship between cap rates and property values?

As cap rates go up, property values go down (A) Signup and view all the answers

Which of the following statements is true about the sensitivity of the going out cap rate in the deal?

It is a significant risk in the deal (C) Signup and view all the answers

What would be the impact if the exit cap rate increased due to a surplus of new buildings in the area?

The cap rate goes up and the property value goes down (C) Signup and view all the answers