I currently work in a bank so I do have some of the required information that is my bank (internal) assigned credit score and the calculated probability of default for every company.

My question is that assuming I wish to create a portfolio of 3 companies, how can I incorporate their PD into my portfolio weights?

E.g. Company A = $100 Outstanding

Company B = $200 Outstanding

Company C = $300 Outstanding

Portfolio weights allocated would then be: Company A: 16.7%, Company B: 33.3%, Company C = 50% Which gives me the sum total of 100% (Weights 1)

Next, assuming Company A PD = 5%, Company B PD = 0.7%, Company C PD = 2% How can I incorporate PD into Weights 1 to come up with a new set of portfolio weights? (Weights 2)

  • 2
    $\begingroup$ I don't understand your goal. What conditions should Weights 2 meet? $\endgroup$
    – Bob Jansen
    Aug 19, 2021 at 19:30


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