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The Nature of Investing: Resilient Investment Strategies through Biomimicry by Katherine Collins

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Transformation 2

From Synthetic to Simple

“We have a great new product,” my friend, a financial advisor, announced. “It’s a synthetic market-hedging security, constructed so that if the market goes down, your losses are limited, but if the market goes up, you capture all of the gains.”

Chatting at a coffee break, this conversation seemed innocent enough, but it came on the heels of the gigantic derivatives losses of 2008 and 2009, so everyone’s risk antennae were up. My advisor friend (I’ll call him Joe) fielded every question with grace and confidence and highly technical language. Still, this security clearly sounded too good to be true, so I asked the question I always ask when someone proposes seemingly magical models to me: “When will this ...

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