- CFA Exams
- CFA Exam: Level II 2021
- Study Session 15. Alternative Investments
- Reading 39. Private Real Estate Investments
- Subject 4. The income valuation approach
CFA Practice Question
Select the correct statements about cap rate.
II. The reciprocal of the cap rate is analogous to the P/E for a stock.
III. The lower the cap rate, the greater income growth potential of a property.
I. It is like a snapshot at a point in time of the relationship between NOI and value.
II. The reciprocal of the cap rate is analogous to the P/E for a stock.
III. The lower the cap rate, the greater income growth potential of a property.
Correct Answer: I, II and III
User Contributed Comments 2
| User | Comment |
|---|---|
| czar | Please could someone explain B and C |
| rlabog | B - Price is equal to market value and NOI can be considered the earnings of the property so in P/E terms the cap rate is NOI/Market Value or Earnings/Price. So the reciprocal would be the inverse of Earnings/Price which is Price/Earnings. C - Value = NOI/Cap Rate - if the denominator decreases, the overall value of the property will increase |