%0 Journal Article %A Henry Fok %A Terry L Benzschawel %T CDO Equity %B The Benefits of Diversification %D 2007 %R 10.3905/jsf.2007.684861 %J The Journal of Structured Finance %P 28-30 %V 13 %N 1 %X Individual CDO equity deals typically have large annual returns, but also can exhibit high return volatility. Using historical cash returns, the authors demonstrate that investors can improve risk-adjusted returns from CDO equity by diversifying into multiple deals, both within and among collateral classes and vintages. A portfolio constructed with even a modest number of CDO equity deals substantially lowers cash return uncertainty over that for a single deal. A 20-deal portfolio decreases the inter-quartile return range by 80%. The marginal impact of CDO equity diversification diminishes rapidly beyond 20 issues in a portfolio. A CDO equity fund-of-funds structure provides an efficient means of accessing a diversified portfolio of CDO equity.TOPICS: Credit risk management, CLOs, CDOs, and other structured credit, portfolio construction %U https://jsf.pm-research.com/content/iijstrfin/13/1/28.full.pdf