Handling the different credit risk sources
In an active approach, forecasts influence the management process. Return expectations play a minor role in this asymmetric risk management. The focus is clearly on risk forecasts. Expectations on volatilities and correlations are used to finally arrive at a portfolio structure which allocates risk to various risk factors (equity market risk, interest rate risk, idiosyncratic risk, etc.) in order to be compensated by earning risk premia, but strictly within the bounds of the current risk budget of the portfolio. But, in contrast to a traditional, forecast-based management approach, disciplined risk control dominates forecasts, even risk forecasts. The approach is flexible enough to easily factor in subordinate goals and restrictions. Because it is active in a nonmechanistic sense, it is also capable of handling the different risk sources present in a corporate bond portfolio.
