Capitalization rates in one segment range from 7.8 to 8.2 percent, and in another from 6.0 to 10.5 percent. What does this suggest?
Correct Answer
D) A rate for the first segment can be selected with more confidence
Why this is correct: A rate for the first segment can be selected with more confidence. The governing concept is that a tight range (7.8% to 8.2%) indicates low dispersion, meaning market participants consistently price similar properties, reducing the risk of error when selecting a rate. The wide range in the second segment (6.0% to 10.5%) suggests a heterogeneous market that should be stratified before analysis. Why the other choices are wrong: The second segment offers better investment returns is wrong because a wide range does not indicate better returns; it indicates inconsistency and higher risk. The first segment contains more transactions overall is wrong; the number of transactions is not indicated by the range of rates. The second segment's rates are recorded inaccurately is wrong; a wide range signals market diversity, not necessarily data inaccuracy. Exam tip: A narrow cap rate range signals a consistent, homogeneous market segment, making rate selection more reliable.
Why This Is the Correct Answer
Why this is correct: A rate for the first segment can be selected with more confidence. The governing concept is that a tight range (7.8% to 8.2%) indicates low dispersion, meaning market participants consistently price similar properties, reducing the risk of error when selecting a rate. The wide range in the second segment (6.0% to 10.5%) suggests a heterogeneous market that should be stratified before analysis. Why the other choices are wrong: The second segment offers better investment returns is wrong because a wide range does not indicate better returns; it indicates inconsistency and higher risk. The first segment contains more transactions overall is wrong; the number of transactions is not indicated by the range of rates. The second segment's rates are recorded inaccurately is wrong; a wide range signals market diversity, not necessarily data inaccuracy. Exam tip: A narrow cap rate range signals a consistent, homogeneous market segment, making rate selection more reliable.
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