Nematrian
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ERM Frameworks and Responses to risk [75]

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Bullet points include: See Kemp (2005). Suppose active positions in portfolio are wi, that the annualised probability of default of a bond rated R is p(R) and the recovery rate in the event of default is y(R). Suppose all bond defaults and recoveries are independent of each other and hence uncorrelated (in practice not accurate). Default loss has a variance of: If n bonds each with the same active weight, w, simplifies to:

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