Chartered Market Technician Practice Exam 2025 – Complete Prep Guide

Capitalization rates, often referred to as cap rates, are a fundamental concept in real estate analysis, representing the relationship between a property's net operating income and its current market value or purchase price. By expressing net income as a percentage of value, the capitalization rate indicates the expected annual return from owning an investment property, essentially reflecting the risk and potential profitability of the investment.

A higher cap rate suggests a higher potential return, but it may also indicate higher risk, while a lower cap rate typically suggests lower potential returns but also lower risk. Therefore, option A correctly identifies the primary purpose of capitalization rates, which is to gauge the annual return that an investor can expect to earn from a property based on its income-generating ability relative to its value.

The other options discuss aspects that are not directly tied to the function of capitalization rates. For instance, while the market value of a property is influenced by its income and cap rate, it is not what the cap rate itself indicates. The net income of the property owner could relate to the cap rate indirectly, but the cap rate specifically measures the return on investment rather than the total income. Lastly, depreciation pertains to the reduction in value over time due to wear and tear or obsolescence and does not reflect what