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Portfolio Management of Default Risk

Portfolio Management of Default Risk

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Published by: vinshm on Oct 30, 2008
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Portfolio Management of DefaultRisk
 
Portfolio Management of Default RiskKMV LLC ii Release Date: 15-November-1993Revised: 31-May-2001
COPYRIGHT
1993-2001 KMV, LLC (KMV), SAN FRANCISCO, CALIFORNIA, USA. All rightsreserved.KMV retains all trade secret, copyright and other proprietary rights in this document. Except forindividual use, this document should not be copied without the express written permission of theowner.Portfolio Manager™, Portfolio Preprocessor™, GCorr™, Global Correlation Model™, SetAnalyzer™, Expected Default Frequency™ and EDF™ are trademarks, and KMV, the KMV logo,Credit Monitor®, EDFCalc® and Private Firm Model® are registered trademarks of KMV LLC.All other trademarks are the property of their respective owners.Published by: Author(s):KMV Stephen Kealhofer1620 Montgomery Street, Suite 140 Jeffrey R. BohnSan Francisco, CA 94111 U.S.A.Phone: +1 415-296-9669FAX: +1 415-296-9458email:support@kmv.comwebsite: http: //www.kmv.com
 
Portfolio Management of Default RiskKMV LLC iii Release Date: 15-November-1993Revised: 31-May-2001
Table of Contents
Introduction................................................................................................................................................................1The Model of Default Risk......................................................................................................................................2Asset Market Value and Volatility.........................................................................................................................5Measurement of Portfolio Diversification............................................................................................................6Model of Default Correlation..................................................................................................................................9Model of Value Correlation...................................................................................................................................11The Likelihood of Large Losses............................................................................................................................15Valuation...................................................................................................................................................................18Economic Capital and Fund Management..........................................................................................................20Risk Contribution and Optimal Diversification...............................................................................................23Risk Contribution and Economic Capital...........................................................................................................28Commitments, Covenants and Exposure ............................................................................................................29Subportfolio and Portfolio.....................................................................................................................................30Relationship and Customer Profitability............................................................................................................30Conclusion................................................................................................................................................................31

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