A weighted average credit rating (WACR) is an objective measure of a portfolio’s credit quality, giving investors insight into the overall creditworthiness of that fund. A WACR is calculated by taking the proportion of each individual credit rating within the portfolio and noting it as a percentage of the entire portfolio. The smaller the overall credit rating, the higher the relative risk of default.

The most commonly used ratings agency letters to calculate a WACR include AAA, BBB and CCC. A portfolio rated AAA will have an average credit rating that is very strong, meaning it would stand a higher chance of avoiding default. BBB and CCC grades signify increasingly more credit risk for the investors, as default probabilities increase.

Although WACR is a great way to glean insight into a portfolio’s credit quality, it is important to note that it does not indicate a prediction with regards to default. Furthermore, WACR does not break the portfolio down into its constituent parts, meaning it does not take into account the individual fault lines within the portfolio.

In addition to WACR, linear factors can also be used to measure a fund's credit quality. This is done by assigning a weight to each rating level based on their respective default probability.

In conclusion, a WACR provides investors with an accurate measure of a portfolio’s credit quality. It is important to note that it should not be taken as an indication of default, but rather a useful tool in assessing a fund’s vitality. Furthermore, linear factors can be used to further understand credit risk in order to provide a more detailed analysis.