Corporate Bond and Commercial Loan Portfolio Analysis

Abstract

In this paper we have presented a new approach to measure the return-risk trade-off in portfolios of risky debt instruments, whether bonds or loans. The use of complex statistically based portfolio techniques to manage assets of financial institutions and fixed income portfolio money managers is very much in its early phase and will continue to evolve, perhaps more quickly in the near future. Our approach substitutes the concept of unexpected loss for the more traditional variance of return measure used in equity securities analysis. Preliminary empirical tests indicate some reason to be optimistic about this approach.