Which of the following statements about capitalization rates is true?

The statement that a lower capitalization rate indicates higher risk is accurate because capitalization rates are a reflection of the expected return on an investment property, relative to its value. A lower cap rate implies that the property is generating a lower return based on its purchase price, which often translates to a perception of lower risk or higher demand for that property. In contrast, properties with higher cap rates typically signal a higher perceived risk or lower demand, as investors expect a higher return to compensate for the increased uncertainty.

This principle helps real estate investors assess the attractiveness of different properties in the market. When a property has a lower cap rate, it generally means that investors are willing to pay more for that income stream, indicating stability and desirability. Thus, the relationship between cap rates and perceived risk is important to understand within real estate investment decision-making.