RT Journal Article SR Electronic T1 Investment-Grade CDOs JF The Journal of Fixed Income FD Institutional Investor Journals SP 65 OP 95 DO 10.3905/jfi.2002.319319 VO 12 IS 1 A1 Glen M. McDermott A1 Terry L. Benzschawel A1 Sohail Khan YR 2002 UL https://pm-research.com/content/12/1/65.abstract AB This report considers the merits and risks of investment-grade collateralized debt obligations using a traditional constant-default methodology and a Monte Carlo simulation technique. Internal rates of return for typical CDO structures are similar calculated by either method, but the simulation approach allows calculation of ex ante Sharpe ratios, with values of over 2.0 for investment-grade CDO equity tranches. The simulations also reveal that increasing the number of firms in a CDO collateral pool from 50 to 100 improves Sharpe ratios by more than 35%, with a diminishing effect for more than 100 obligors. History indicates that the pace of credit deterioration of investment-grade CDO collateral provides the CDO manager ample opportunity to minimize loss of par. It also suggests that obligor breadth and the industry diversity of the investment-grade corporate market minimize the ramp-up period required after closing. Inclusion of CDO equity in a portfolio can enhance expected risk-adjusted return.