Investment Possibilities

In the last week I've set about funding my prosper account, which has been a fairly straight forward - albeit lengthy - process. As such, as I've waited for my funds to become available, I've had a chance to evaluate some of the statistics on the site.

Prosper has a few statistics available in various place on the site, the most interesting I've come across is the following:

Source: prosper.com

This data represents YTD statistics. The interesting observation seems to be that after fees/expenses and defaults B loans actually yield more than C loans. This is of interest, because the risk of a B loan is supposed to be lower than that of C loans, and therefore C loans should yield higher to compensate lenders for the additional risk. As such, with B loans seemingly having a higher yield and a lower risk, these are a prime candidate for investment.

The rest of the implied risk curve from the data is as would be expected through E rated loans, with compensation rising as risk rises. Tenor is equal for all the loans, and as such does not have an impact of this curve. However the HR loans do not appear to follow suit with average annual return falling to only 3.35%. The data indicates that this is due largely to defaults. As such, it's possible to extrapolate that lenders are not being adequately compensated for the risk of these loans.

In conclusion, when considering investment options, this data would suggest a few things: 1) B loans seemingly offer the lender a greater return for their risk than should be expected. 2) HR loans offer far inferior returns to lenders. As such, when constructing a diversified portfolio of loans, an overweighting on B rated loans would be beneficial, while a significant under weighting of HR rated loans would also seem prudent.



[the above information should not be considered investment advice. Should you decide to invest money through prosper (or any other platform) you should conduct your own analysis of the data, and reach your own conclusion]