What proportion of market participants understand the models describing the consequences of their behavior?

<t>Even with no information as to the distribution of returns I guess one could interpret the Sharpe Ratio as the price of risk. If it is high, then one is being paid more to take on risk. Distinguishing between skill and luck is never a quantitative exercise. It is more useful to interview a manage...

No expert but it seems to me that whereas in CDOs you have conditional probabilities to work out, in CDO2 you have a pretty complex set of nested conditions to work out.

I don't think one needs to worry about the no-arbitrage condition since detecting arbitrage would imply transaction prices in the interior of the range of interpolation. If such existed, one could obtain the vol surface with the inclusion of these prices.