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The Capital Markets: Portfolio Construction

A detailed study on portfolio construction, risk assessment, and return computation to explore risk-return possibilities. Analyzing bond, market, and credit risk with CreditMetrics methodology for efficient portfolio management.

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The Capital Markets: Portfolio Construction

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  1. New York University/ING Barings The Capital Markets: Portfolio Construction Prof. Ian Giddy New York University

  2. Case Study: A Portfolio

  3. Portfolio Return Computation

  4. Portfolio Risk Computation

  5. To Find the Risk-Return Possibilities, Vary the Proportions E(r) A B

  6. The Minimum-Variance Frontier of Risky Assets E(r) “Efficient frontier” Individual assets Global minimum-variance portfolio

  7. Risk Bond Risk Market Risk Credit Risk

  8. Bond Credit Ratings

  9. Credit Risk versus Market Risk

  10. CreditMetrics Methodology • Establishes the exposure profile of each obligor in a portfolio. • Computes the volatility in value of each instrument caused by possible upgrades, downgrades, and defaults. • Taking into account correlations between each of these events, it combines the volatility of the individual instruments to give an aggregate portfolio volatility.

  11. CreditMetrics Roadmap Exposures Value-at-risk due to credit Correlations Compute exposure profile of each asset Compute the volatility of value caused by upgrades/downgrades and defaults Compute correlations Portfolio value-at-risk due to credit

  12. Volatilities from “Transition Matrix”

  13. Construction of Volatility Across Credit Horizons

  14. Defaults and Recovery Rates

  15. A Picture of a BBB Bond’s Value Distribution

  16. Calculating Mean and Standard Deviation

  17. CreditMetrics www.creditmetrics.com

  18. www.giddy.org

  19. www.giddy.org Ian Giddy NYU Stern School of Business Tel 212-998-0332; Fax 212-995-4233 ian.giddy@nyu.edu http://www.giddy.org

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