FIN 701 Lecture Notes - Lecture 7: Partial Application, Credit Risk, Life Insurance
13 Apr 2016
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Chapter 11 credit risk: loan portfolio and concentration risk: learning outcomes. Concentration limits: on loans to individual borrower. o o. Concentration limit = maximum loss loss rate. Maximum loss expressed as percent of capital. Some countries, such as chile, specify limits by sector or industry: osfi sets large exposure limits . For banks: credit risk at a maximum of 25% of the fi"s total capital. For p&c and life insurance companies" investments cannot exceed 5% of a company"s assets. X i x j ij i j. Rp = expected or mean return on the asset portfolio. Xi = proportion of the asset portfolio invested in the ith asset (the desired concentration amount. Ij = covariance of returns between the ith and jth assets. Ij = correlation between the returns on the ith and jth assets. Minimum-risk portfolio combination of assets that reduces the variance of portfolio returns to the lowest feasible level.
