Question

Please answer question b

1a. Describe how modern portfolio theory can be applied to manage the credit risk of a loan portfolio.

The core idea in modern portfolio theory is that one can reduce risk without compromising on returns using the strategy of diversification. In other words, mean return per unit of risk (say, variance or beta) can be maximized by constructing a well diversified portfolio.

Since the risk factors in a loan portfolio are dependent upon sectors, geographies, term to maturity size etc. the portfolio manager can ensure that his / her portfolio is well diversified across these categories. As long as the asset being added to the portfolio isn't perfectly correlated to the portfolio, it results in at least some benefit of diversification. The best assets are the ones with the least (ideally negative) correlation with the portfolio.

b. Explain how Moody Analytics alters standard portfolio theory for managing the credit risk of a loan portfolio.

Answer 1

Moody’s Analytics is a subsidiary of moddy'st corporation offers tools, solutions and best practices for measuring and managing risk. It provides financial intelligence to help clients navigate and respond to an evolving marketplace.

Key Terms

• Moody's Analytics is a top-tier analysis group, offering exceptional coverage of credit ratings, world events, and worldwide risk factors.
• The group has historically been active in acquisitions, broadening their knowledge and talent base in order to offer more in-depth advice and solutions.
• Although Moody's offers great tools and solutions, their intelligence should be used as one of the many tools in an investor's toolkit, and not the single deciding factor behind investment decisions.

Understanding Moody's Analytics

Moody’s Analytics helps organizations and professionals across industries understand the complexities of modern-day business and capitalize on market developments around the world. Its clients include capital markets participants as well as finance, accounting, compliance and risk management professionals. The company aims to help risk professionals make informed decisions and build successful strategies.

Its areas of expertise include credit analysis, economic forecasting, risk management, regulatory compliance, and training. The company employs subject matter experts who provide industry expertise and insight and have broad experience in credit analysis, economic research and risk management.

Moody’s Analytics started as a commercial distributor of ratings, content, and research from Moody’s Investors Service. While it still serves in that capacity, Moody's Analytics has broadened its offerings to include more financial risk solutions. It became an independent entity from Moody’s Investors Service in 2008, and the company has since grown to be a global provider through solution innovation and strategic acquisitions.

Some examples of Moody's analytics :

1. Asset liability Management.

2. Credit origination

3. Data

4. Economic

5. Insurance

6. Investments and pensions

7. Portfolio management

8. Regularity & Accounting

9. Structured Finance

10. Learning solutions and certifications.

• Asset and liability management (ALM): Integrates enterprise ALM, liquidity risk management, funds transfer pricing, and regulatory reporting capabilities into an enterprise platform. Although Moody's Analytics split from Moody's Investors Service, the group still maintains a strong foothold in these services
• Credit origination: end-to-end solutions to help lenders make more profitable loans faster
• Data: comprehensive datasets and data management tools
• Economic: global economic data, forecasts, and analyses. Moody's is known for this solution more than the others, as they offer some of the best economic data outside of government agencies and bulge-bracket banks
• Insurance: stochastic models, software and services
• Investments & Pensions: scenario-based asset-liability modeling, investment design, and risk management solutions
• Portfolio Management: research, data, models and multi-asset class credit risk tools
• Regulatory & Accounting: addresses global regulations and accounting frameworks for the measurement and reporting of capital impacts.
• Structured Finance: market insight through research, data, and analytics
• Learning Solutions and Certifications: global financial risk management understanding and proficiency

Special Consideration: Investment Advice

Many investors, institutional and private, use Moody's to strengthen their understanding of the markets and the possible direction of the positions they hold. However, Moody's functions like any other analytics group, and should be considered as a tool to use in one's analysis, not the deciding facto or driving Investment factor.