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Originally Posted by Cool Bear
No. The second default table is already included in the first annual rate of return table. So if Harmoney's estimates are correct, it is still better to invest in the more risky D to F as the returns are in the 14 to 15%. However, Myles' working is based on an even spread of defaults. So the actuals will be a bit different.
Yeah but, the variability of returns (ie risk) goes up as the grade increases. An expected return of 15% on a D grade is better than 15% on a E grade, you need a higher return to compensate for the higher risk. There's a difference between maximising and optimising return. Harmoney's pricing of loans should take this into account but to me feels, admittedly from a position of relative ignorance, under-cooked at the lower and upper ranges.
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