medium · FRM Part 2 Credit Risk
The Basel IRB capital formula (Vasicek model) assumes an 'asymptotically fine-grained portfolio'.
What is the primary implication of this assumption?
- Systematic risk is completely diversified away by the portfolio, leaving only idiosyncratic risk exposure.
- Correlation between individual obligors within the portfolio is assumed to be exactly zero for capital purposes.
- The aggregate loss distribution of the portfolio is assumed to follow a standard normal distribution, not a skewed one.
- Capital charges are portfolio-invariant, meaning the charge for a loan depends only on its own risk characteristics.
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