Credit Risk (Default Risk)
The risk a borrower fails to make promised payments.
What is Credit Risk (Default Risk)?
The chance an issuer misses coupons or principal. Compensated through a credit spread over Treasuries. Concentrated in corporate and high-yield debt; effectively absent from Treasuries.
Credit Risk (Default Risk): a worked example
A BB-rated issuer yields 7% against a 4% Treasury - a 300 bp spread for default risk.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.