  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. Under fairly general assumptions for the distribution of
the total net assets of a set of firms 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. We also provide
explicit results for the inverse problem, i.e. for a given allocation to the
set of risky bonds, what is the average risk premium required to make the
portfolio optimal. Numerous numerical illustrations exhibit the results for
realistic portfolios and utility functions.
