Which of the following were fundamental flaws in the decisions made by participants in the securitized mortgage market that contributed to its boom through 2007?
I.Leverage creates value.
II.Lower costs create value.
III.Diversification creates value.
IV.Lower cost of capital creates value.
A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.

Question

Quizplus · Accepted Answer

Leverage and diversification were two fundamental flaws in the decisions made by participants in the securitized mortgage market that contributed to its boom through 2007. In particular, the belief that leverage creates value led to excessive borrowing and speculation, while the belief that diversification creates value led to the bundling of risky mortgages into complex financial products that were difficult to value and understand. Lower costs and a lower cost of capital were not necessarily flawed decisions in themselves, but they were often used to justify these riskier strategies.

Which of the Following Were Fundamental Flaws in the Decisions