Comprehensive Credit Risk Management in Corporate Bonds

You are the Chief Risk Officer at a large asset management firm. The firm’s recent strategic decision to invest heavily in corporate bonds, particularly those with lower credit ratings, has raised concerns about the potential impact of credit risk on the portfolio's overall performance. In light of the prevailing economic conditions, characterized by rising interest rates and increased market volatility, you are required to develop a comprehensive credit risk management strategy.

In your response, discuss the primary components of an effective credit risk management framework. Consider various elements such as credit assessment processes, portfolio diversification techniques, use of credit derivatives, stress testing, and monitoring systems. Additionally, outline the potential mitigation strategies to manage exposure to credit risk in a corporate bond portfolio. Be sure to justify your approach while considering the implications of your proposed strategies on both risk and return.