Suppose That an ABS Is Created from a Portfolio of Subprime

question 16

Multiple Choice

Suppose that an ABS is created from a portfolio of subprime mortgages with the following allocation of the principal to tranches: senior 80%,mezzanine 10%,and equity 10%.Losses on the mortgage portfolio prove to be 16%.What,as a percent of tranche principal,are losses on the mezzanine tranche of the ABS

• A) 50%
• B) 60%
• C) 80%
• D) 100%

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Definitions:

Double-Blind Procedure

An experimental procedure in which both the research participants and the research staff are ignorant (blind) about whether the research participants have received the treatment or a placebo. Commonly used in drug-evaluation studies.

Placebo Effect

Experimental results caused by expectations alone; any effect on behavior caused by the administration of an inert substance or condition, which the recipient assumes is an active agent.

Overconfidence

The tendency to be more confident than correct—to overestimate the accuracy of our beliefs and judgments.

Illusory Correlation

The perception of a relationship where none exists.