1. Portfolio Construction
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

6. The Minimum-Variance Frontier of Risky Assets
“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

21. www.giddy.org Ian Giddy NYU Stern School of Business
Tel ; Fax