True or False: Variability expectations in the discount rate affect asset prices.

Variability expectations in the discount rate indeed affect asset prices. The discount rate is a critical component in determining the present value of future cash flows generated by an asset, including real estate. When investors expect variability—often driven by changes in interest rates, economic conditions, or risk perceptions—they may adjust their required return on investment. This adjustment alters how much they are willing to pay for an asset.

For example, if investors anticipate a higher variability in the discount rate, they may require a higher return on their investments to compensate for the increased risk. This higher required return leads to a decrease in the present value of projected cash flows, resulting in a lower asset price. Conversely, if variability expectations decrease, the required return might also decline, potentially increasing asset values.

This concept is not limited to a specific type of investment or market; it applies across various asset classes and market conditions. Understanding how these expectations influence asset values highlights the broader implications of market sentiment and economic indicators on investment decisions.