Final answer:
Yes, the selling group does take on financial risk for securities, specifically with mortgage-backed securities, where different investors assume different tiers of losses. The first set of investors takes on the most significant financial risk.
Step-by-step explanation:
In the context of mortgage-backed securities (MBS), a selling group does indeed take on financial risk. When financial institutions sold subprime loans, they were often bundled into MBS and sold to investors based on different risk tolerances. Some investors agreed to absorb the first tier of losses, typically around the first 5%, which exemplifies the tranche that carries the highest risk. Subsequent investors would agree to take on the next levels of losses, say the next 5%.
Thus, it was only if the mortgage-backed financial securities depreciated significantly, beyond 25% to 30% of their total value, that later investors would begin to incur losses. Therefore, those investors within the first tier take on the most significant financial risk. The financial crisis of the mid-2000s can be attributed, in part, to such an allocation of risk in subprime mortgage securities, leading to a substantial increase in the proliferation of subprime loans.