Portfolio Management Techniques Flashcards

Classical single-liability immunization requires the portfolio's:

Answer: Macaulay duration to equal the liability horizon

Matching Macaulay duration to the horizon offsets price risk against reinvestment risk.

Relative to a duration-matched bullet portfolio, a barbell portfolio generally:

Answer: Has higher convexity

Spreading cash flows to the extremes increases dispersion and therefore convexity.

Compared with duration-matching immunization, cash flow matching:

Answer: Minimizes reinvestment risk but is typically more costly

Exact cash flow matching avoids reinvestment risk but constrains bond selection, raising cost.

With an upward-sloping yield curve expected to stay stable, a manager buys bonds maturing beyond the horizon and sells them at horizon end to capture roll-down gains. This is:

Answer: Riding the yield curve

As the bond ages, its yield falls along the curve, producing a price gain.

A manager pursues active bond strategies until the surplus falls to a safety-net level, then switches to immunization. This is:

Answer: Contingent immunization

Contingent immunization permits active management only while a cushion above the required return remains.

A pension with liability duration of 15 and asset duration of 6 (similar values) is most exposed to:

Answer: Falling interest rates reducing surplus

Falling rates increase long-duration liabilities more than shorter-duration assets, shrinking surplus.

A bond ladder is primarily valued because it:

Answer: Spreads reinvestment risk across time and provides regular liquidity

Evenly staggered maturities provide periodic cash and diversify reinvestment timing.