There are three underlying assets in an investment pool. Each has a 6% chance of defaulting....
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There are three underlying assets in an investment pool. Each has a 6% chance of defaulting. If an asset does not default it pays $1. The first two assets have a 60% correlation between each other. The third asset is uncorrelated with the first 2. Financial engineers create three products. They have payoffs as follows: Product 1: Pays $1 if any of the three assets pays, 0 otherwise. Product 2: Pays $1 if any two of the three assets pays, 0 otherwise. Product 3: Pays $1 if all three of the assets pay, 0 otherwise. What is the probability of each of these assets paying off? Which of these assets can be considered "investment grade"? There are three underlying assets in an investment pool. Each has a 6% chance of defaulting. If an asset does not default it pays $1. The first two assets have a 60% correlation between each other. The third asset is uncorrelated with the first 2. Financial engineers create three products. They have payoffs as follows: Product 1: Pays $1 if any of the three assets pays, 0 otherwise. Product 2: Pays $1 if any two of the three assets pays, 0 otherwise. Product 3: Pays $1 if all three of the assets pay, 0 otherwise. What is the probability of each of these assets paying off? Which of these assets can be considered "investment grade"?
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