PT - JOURNAL ARTICLE AU - Richard L. Cooperstein TI - Analyzing Non-Agency RMBS: <em>A Practical</em> <br/> <em>Application of Option-Adjusted Returns</em> AID - 10.3905/jsf.2012.18.2.027 DP - 2012 Jul 31 TA - The Journal of Structured Finance PG - 27--32 VI - 18 IP - 2 4099 - https://pm-research.com/content/18/2/27.short 4100 - https://pm-research.com/content/18/2/27.full AB - Risky markets like non-agency RMBS require methods to determine risk-adjusted returns. Risk is properly defined as the volatility of potential returns, and options theory provides metrics to compare one bond investment with another. Credit option-adjusted spread (COAS) is determined from thorough simulation analysis of the underlying risks of future house price and interest rate movements and their impact on borrower behavior and thus bond cash flows. The usefulness of COAS is that Risk-Adjusted Return = Gross Yield – COAS. RAR is superior to other methods of investment volatility because RAR can be directly compared from one investment to another.TOPICS: MBS and residential mortgage loans, CMBS and commercial mortgage loans