1. Capitalization rate can be decomposed into three distinct components: a risk-free return, a risk-premium specific to investment in real estate, and the expected average growth rate of NOI. Consider a generic property in Newark that will generate income NOI1 next year with certainty. How will cap rates and property values respond if several firms currently located in New York City decide to move their operations to Newark?

cap rates will increase and property values will decrease.

cap rates will increase and property values will increase.

cap rates will decrease and property values will increase.

cap rates will decrease and property values will decrease.

2. The simplest technique to cope with the uncertainty inherent in realistic financial projections is:

A. Ad hoc adjustments

B. Trend analysis

C. Simulation

D. Sensitivity analysis

E. Scenario analysis