Which of the following is true regarding mortgage-backed security tranches?

Question

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Different tranches in a mortgage-backed security have different default risk exposure. This is because each tranche represents a different level of risk and return. The lower tranches (i.e. subordinated tranches) have higher default risk exposure but offer higher returns, while the higher tranches (i.e. senior tranches) have lower default risk exposure but offer lower returns. Therefore, investors can choose which tranche to invest in based on their risk tolerance and return expectations.

Which of the Following Is True Regarding Mortgage-Backed Security Tranches