TY - JOUR T1 - A Look at CDO Equity in a Portfolio Context JF - The Journal of Structured Finance SP - 37 LP - 54 DO - 10.3905/jsf.2006.628544 VL - 12 IS - 1 AU - Terry L Benzschawel AU - Henry Fok Y1 - 2006/04/30 UR - https://pm-research.com/content/12/1/37.abstract N2 - The equity tranches of collateralized debt obligations are risky, but offer high potential returns. Mean variance optimizations of portfolios containing traditional and alternative asset classes that include CDO equity of different collateral types indicate that: 1) CDO equity can enhance returns on portfolios of traditional asset classes through only partially correlated non-recourse leverage on the underlying collateral and 2) CDO equity in a portfolio of typical alternative assets (i.e., hedge funds, private equity, etc.) acts as a diversifier, thereby improving risk-adjusted returns. A portfolio of CDO equity tranches with differing underlying collateral has greater expected returns and lower volatility than CDO equity from any one of the underlying asset classes, supporting its characterization as a unique alternative asset class.TOPICS: CLOs, CDOs, and other structured credit, other real assets, portfolio construction ER -