  This article deals with the problem of optimal allocation of capital to
corporate bonds in fixed income portfolios when there is the possibility of
correlated defaults. Using a multivariate normal Copula function for the joint
default probabilities we show that retaining the first few moments of the
portfolio default loss distribution gives an extremely good approximation to
the full solution of the asset allocation problem. We provide detailed results
on the convergence of the moment expansion and explore how the optimal
portfolio allocation depends on recovery fractions, level of diversification
and investment time horizon. Numerous numerical illustrations exhibit the
results for simple portfolios and utility functions.
