Which of the Following Is True as the Correlation Between

question 20

Multiple Choice

Which of the following is true as the correlation between mortgage defaults increases?

• A) Equity tranches are almost certain to incur losses
• B) Senior tranches become more likely to incur losses
• C) The expected number of defaults increases
• D) Equity tranches are unaffected

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Definitions:

Securitization

The process of transforming illiquid assets into a tradable form by converting them into securities.

Private Equity

Capital investments made into companies that are not publicly traded, often to finance growth, acquisitions, or restructuring.

Dodd-Frank Reform Act

A comprehensive piece of financial regulation passed in 2010 in the United States, aimed at preventing the recurrence of financial crises through increased regulation.

Capital Requirements

The minimum amount of capital a bank or other financial institution must hold as required by its financial regulator.