Question by answerman: True or False? Securitizations of financial claims and securities such as mortgages have reduced the risk?
facing international investors.

Best answer:

Answer by meg
That is what the wall street bank believed and the credit rating agencies agreed. They thought by packaging mortgages from different regions of the country they could reduce the standard deviation in the return , and that is how risk is measured in finance. They assumed that each real estate market was and independent, that is the price movements in Florida and California were not correlated, What was missing from the calculations was the catastrophic loses that would result if home price fell in all markets at the same time, one outlier like that can cause a big increase the standard deviation even if it has a small probably.

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