For example, when the dollar strengthened against other rates, it will affect the profit and value of companies operating internationally. If a majority of firms in the market has a significant volume of international transactions, the risk of increasing the dollar can be attributed to market risk. If international operations are occupied only a few companies, this risk is closer to the risk at the firm level. Why Diversification reduces or eliminates the risk at the firm level? As an investor you can make up your portfolio investing all the money in one asset. If you do it this way, you expose yourself to as market risk and specific risk of the firm. If you expand your portfolio to include the other assets or shares, you diversify a portfolio, thereby reducing their dependence on the level of investment risk as a separate company. On the contrary, environmental changes affecting the entire market as a whole, will act in the same direction for the majority of investments in the portfolio, although the impact on some assets will probably be stronger than the others.
For example, other things being equal, higher interest rates lead to lower values most of the assets in the portfolio. Extension of diversification will not eliminate this risk and will not reduce the value of its assessment. Therefore, risk assessment of this group are also relevant. Risk assessment: general principles is one of the main requirements Basel Committee (Basel II) is under the bank's capital to the risks that need to be able to evaluate, to formulate capital requirements that ensure the reliability of the bank. It does not return individual loans are not bring tangible damage to the bank, if it can be compensated by reserves earmarked for the expected losses on credit operations (Expected Loss, EL). In addition, there is a chance of loss substantially all the assets in the loan portfolio, leading to the bankruptcy of the bank.
Such losses are called unexpected losses (Unexpected loss, UL). All this must be considered when assessing risk. In connection with this assessment of financial risk is carried out, based on two positions – both EL and UL. Expected losses risk assessment evaluated the likelihood of default on the borrower, as well as the amount of security for loans. The value of the expected loss directly affects the profits of the credit product, as necessary deduct the insurance amount to the reserve fund highly liquid with each loan, this amount should not be less than the value EL. The value of unexpected losses in assessing the risk of the portfolio also indirectly affects the profits of the credit activity, because it determines the proper level of security and the bank's loan portfolio as a whole. Own level of reliability is determined by matching the capital at risk (own economic capital) possibility of unexpected losses that may occur with a probability to a full complement probability (level of) reliability. More strictly measured by the UL VAR (Value at risk) at the level of reliability. One of the main and trivial problems in assessing the financial risk – an assessment and calculate the probability of borrower defaults. We have two approaches to calculating PD. The first is based on qualitative and quantitative assessment of the borrower's rating from its internal financial indicators and specific business factors. The second is based on the capitalization of the borrower in the stock market and the level of its debts to creditors. Unfortunately, the second approach, although it is more objective, applicable only to a small number of Russian public companies.