What does a granular CVaR approach involve?

A granular Conditional Value at Risk (CVaR) approach emphasizes risk management through diversification by increasing the number of individual credit exposures while simultaneously reducing the weight of each individual credit. This method mitigates concentration risk, which can arise when a portfolio is overly reliant on a small number of significant exposures. By diversifying across a greater number of credits, it enhances the risk profile and improves the stability of returns.

This approach allows for a more detailed assessment of potential losses in various scenarios, which is crucial for accurately determining the risks associated with investments. It also aligns with the modern portfolio theory, which suggests that diversification can help minimize the overall risk of the portfolio while optimizing returns. Thus, focusing on spreading exposures across various credits rather than concentrating them in a few significant positions is essential in a granular CVaR strategy.