Observed capitalization rates range from 7.8% to 8.2% in one segment and 6.0% to 10.5% in another. What conclusion follows from these ranges alone?
Correct Answer
D) The first segment has the narrower observed rate range
The first observed range is 8.2−7.8 = 0.4 percentage points; the second is 10.5−6.0 = 4.5 percentage points. The first has a narrower observed range. Range alone does not establish comparable sample sizes, data accuracy, market homogeneity or confidence in selecting a subject rate; the relevant properties and source quality require investigation.
Why This Is the Correct Answer
Option D is correct because the first segment's range is 8.2% - 7.8% = 0.4 percentage points, while the second's is 10.5% - 6.0% = 4.5 percentage points. The first segment therefore has the narrower observed rate range. That is the only conclusion the ranges alone support.
Why the Other Options Are Wrong
Option A: The second segment offers better investment returns
Option A, saying the second segment offers better investment returns, does not follow from a range. A wider spread of cap rates describes variability, not which segment produces superior returns.
Option B: The first segment contains more observations
Option B, saying the first segment contains more observations, cannot be concluded from a range. The range uses only the highest and lowest values and reveals nothing about how many observations exist.
Option C: The second segment contains inaccurate data
Option C, saying the second segment contains inaccurate data, is unsupported. A wide range can reflect genuine differences among properties; data accuracy requires checking the sources.
Range shows width only
A range tells you how wide the spread is, and nothing about count, quality or returns.
How to use: Use this to reject answer choices that read more into a range than its width.
Exam Tip
When a question says from these ranges alone, choose the answer that only restates what the ranges measure.
Common Mistakes to Avoid
- -Inferring sample size from a range
- -Assuming a wide range means bad data
- -Treating a higher range of rates as better investment returns
Concept Deep Dive
Analysis
This question tests what a range can and cannot tell you. Computing the two ranges is simple, but the key is avoiding conclusions the range does not support. Range uses only the two extreme points and says nothing about sample size, data quality or returns.
Background Knowledge
The range is the largest value minus the smallest and depends only on the two extreme observations. Appraisers investigate the underlying properties and data sources before drawing conclusions about homogeneity or reliability from a spread of rates.
Real-World Application
An appraiser gathering cap rates finds tight agreement for neighborhood retail centers and a wide spread for older office buildings. Before relying on either, the appraiser examines the individual sales to learn why the office rates vary so much.
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For positive assessment-to-sale ratios, define COD as 100 × mean absolute deviation from their median ÷ median. How does it differ from the median ratio?
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