《债券市场：分析与策略（第七版）》Ch23

Chapter23

ActiveBondPortfolioManagementStrategies

23-1Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallLearningObjectivesAfterreadingthischapter,youwillunderstandthefivebasicstepsinvolvedintheinvestmentmanagementprocessthedifferencebetweenactiveandpassivestrategieswhattrackingerrorisandhowitiscomputedthedifferencebetweenforward-lookingandbackward-lookingtrackingerrorthelinkbetweentrackingerrorandactiveportfoliomanagementtheriskfactorsthataffectabenchmarkindextheimportanceofknowingthemarketconsensusbeforeimplementinganactivestrategy23-2Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallLearningObjectives

(continued)Afterreadingthischapter,youwillunderstandthedifferenttypesofactivebondportfoliostrategies:interest-rateexpectationsstrategies,yieldcurvestrategies,yieldspreadstrategies,option-adjustedspread-basedstrategies,andindividualsecurityselectionstrategiesbullet,barbell,andladderyieldcurvestrategiesthelimitationsofusingdurationandconvexitytoassessthepotentialperformanceofbondportfoliostrategieswhyitisnecessarytousethedollardurationwhenimplementingayieldspreadstrategyhowtoassesstheallocationoffundswithinthecorporatebondsectorwhyleveragingisusedbymanagersandtradersandtherisksandrewardsassociatedwithleveraginghowtoleverageusingtherepomarket23-3Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcessRegardlessofthetypeoffinancialinstitution,theinvestmentmanagementprocessinvolvesthefollowingfivesteps:settinginvestmentobjectivesestablishinginvestmentpolicyselectingaportfoliostrategyselectingassetsmeasuringandevaluatingperformance23-4Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess(continued)SettingInvestmentObjectivesThefirststepintheinvestmentmanagementprocessissettinginvestmentobjectives.Theinvestmentobjectivewillvarybytypeoffinancialinstitution.EstablishingInvestmentPolicyThesecondstepininvestmentmanagementprocessisestablishingpolicyguidelinesformeetingtheinvestmentobjectives.Settingpolicybeginswiththeassetallocationdecisionsoastodecidehowthefundsoftheinstitutionshouldbedistributedamongthemajorclassesofinvestments(cashequivalents,equities,fixed-incomesecurities,realestate,andforeignsecurities).23-5Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess

(continued)SelectingaPortfolioStrategySelectingaportfoliostrategythatisconsistentwiththeobjectivesandpolicyguidelinesoftheclientorinstitutionisthethirdstepintheinvestmentmanagementprocess.Portfoliostrategiescanbeclassifiedaseitheractivestrategiesorpassivestrategies.Essentialtoallactivestrategiesisspecificationofexpectationsaboutthefactorsthatinfluencetheperformanceofanassetclass.Passivestrategiesinvolveminimalexpectationalinput.23-6Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess

(continued)SelectingaPortfolioStrategyStrategiesbetweentheactiveandpassiveextremeshavesprungupthathaveelementsofbothextremestrategies.Forexample,thecoreofaportfoliomaybeindexed,withthebalancemanagedactively.Oraportfoliomaybeprimarilyindexedbutemploylow-riskstrategiestoenhancetheindexedportfolio’sreturn.Thisstrategyiscommonlyreferredtoasenhancedindexingorindexingplus.23-7Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess

(continued)SelectingaPortfolioStrategyInthebondarea,severalstrategiesclassifiedasstructuredportfoliostrategies

havecommonlybeenused.Astructuredportfoliostrategycallsfordesignofaportfoliotoachievetheperformanceofapredeterminedbenchmark.Suchstrategiesarefrequentlyfollowedwhenfundingliabilities.Whenthepredeterminedbenchmarkisthegenerationofsufficientfundstosatisfyasingleliability,regardlessofthecourseoffutureinterestrates,astrategyknownasimmunization

isoftenused.Whenthepredeterminedbenchmarkrequiresfundingmultiplefutureliabilitiesregardlessofhowinterestrateschange,strategiessuchasimmunization,cashflowmatching(ordedication),orhorizonmatchingcanbeemployed.23-8Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess

(continued)SelectingaPortfolioStrategyGiventhechoiceamongactive,structured,orpassivemanagement,theselectiondependsontheclientormoneymanager’sviewofthepricingefficiencyofthemarketthenatureoftheliabilitiestobesatisfiedPricingefficiencyistakentodescribeamarketwherepricesatalltimesfullyreflectallavailableinformationthatisrelevanttothevaluationofsecurities.Whenamarketispriceefficient,activestrategieswillnotconsistentlyproducesuperiorreturnsafteradjustingforriskandtransactionscosts.23-9Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess

(continued)SelectingAssetsAfteraportfoliostrategyisspecified,thefourthstep

intheinvestmentmanagementprocessistoselectthespecificassetstobeincludedintheportfolio,whichrequiresanevaluationofindividualsecurities.Itisinthisphasethattheinvestmentmanagerattemptstoconstructanefficientportfolio.Anefficientportfolioisonethatprovidesthegreatestexpectedreturnforagivenlevelofrisk,or,equivalently,thelowestriskforagivenexpectedreturn.23-10Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallOverviewoftheInvestmentManagementProcess

(continued)MeasuringandEvaluatingPerformanceThemeasurementandevaluationofinvestmentperformanceisthefifthandlaststepintheinvestmentmanagementprocess.Thisstepinvolvesmeasuringtheperformanceoftheportfolio,thenevaluatingthatperformancerelativetosomebenchmark.Thebenchmarkselectedforevaluatingperformanceiscalledabenchmark

ornormalportfolio.ThebenchmarkportfoliomaybeapopularindexsuchastheS&P500forequityportfoliosoroneofthebondindexes.23-11Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategiesBeforediscussingbondportfoliostrategies,itisessentialtounderstandanimportantanalyticalconcept.Whenaportfoliomanager’sbenchmarkisabondmarketindex,riskisnotmeasuredintermsofthestandarddeviationoftheportfolio’sreturn.Instead,riskismeasuredbythestandarddeviationofthereturnoftheportfoliorelativetothereturnofthebenchmarkindex.Thisriskmeasureiscalledtrackingerror.Trackingerrorisalsocalledactiverisk.23-12Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies(continued)CalculationofTrackingErrorTrackingerroriscomputedasfollows:Step1:Computethetotalreturnforaportfolioforeachperiod.Step2:Obtainthetotalreturnforthebenchmarkindexforeachperiod.Step3:ObtainthedifferencebetweenthevaluesfoundinStep1andStep2.Thedifferenceisreferredtoastheactivereturn.Step4:Computethestandarddeviationoftheactivereturns.Theresultingvalueisthetrackingerror.

Thetrackingerrormeasurementisintermsoftheobservationperiod.

Ifmonthlyreturnsareused,thetrackingerrorisamonthlytrackingerror.

Ifweeklyreturnsareused,thetrackingerrorisaweeklytrackingerror.23-13Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies

(continued)Exhibit23-1(seeOverheads23-15and23-16)showsthecalculationofthetrackingerrorfortwohypotheticalportfoliosassumingthatthebenchmarkistheLehmanU.S.AggregateIndex.PortfolioA’smonthlytrackingerror(inOverhead23-15)is9.30basispointswherethemonthlyreturnsoftheportfoliocloselytrackthereturnofthebenchmarkindex—thatis,theactivereturnsaresmall.Incontrast,forPortfolioB(inOverhead23-16),theactivereturnsarelarge,andthus,themonthlytrackingerrorislarge—79.13basispoints.Thetrackingerrorisuniquetothebenchmarkused.Exhibit23-2(seeOverheads23-17and23-18)showsthetrackingerrorfortheportfoliosusingtheLehmanGlobalAggregateIndex.ThemonthlytrackingerrorforPortfolioA(inOverhead23-17)is76.04basispointscomparedto9.30

basispointswhenthebenchmarkistheLehmanU.S.AggregateIndex;forPortfolioB(inOverhead23-18),itis11.92basispointsfortheLehmanGlobalIndexversus79.13basispointsfortheLehmanU.S.AggregateIndex.23-14Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-1CalculationofTrackingErrorforTwoHypotheticalPortfolios:BenchmarkIstheLehmanU.S.AggregateIndex(PortfolioA)

Observationperiod=January2007–December2007;Benchmarkindex=LehmanU.S.AggregateIndexPortfolioAMonthin2007PortfolioReturn(%)BenchmarkIndexReturn(%)ActiveReturn(%)January-0.02-0.040.02February1.581.540.04March-0.040.00-0.04April0.610.540.07May-0.71-0.760.05June-0.27-0.300.03July0.910.830.08August1.261.230.03September0.690.76-0.07October0.950.900.05November1.081.040.04December0.020.28-0.26Sum0.041Mean0.0034Variance0.0086StandardDeviation=Trackingerror0.0930Trackingerror(inbasispoints)9.3023-15Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-1CalculationofTrackingErrorforTwoHypotheticalPortfolios:BenchmarkIstheLehmanU.S.AggregateIndex(PortfolioB)

Observationperiod=January2007–December2007;Benchmarkindex=LehmanU.S.AggregateIndexPortfolioBMonthin2007PortfolioReturn(%)BenchmarkIndexReturn(%)ActiveReturn(%)January-1.05-0.04-1.01February2.131.540.59March0.370.000.37April1.010.540.47May-1.44-0.76-0.68June-0.57-0.30-0.27July1.950.831.12August1.261.230.03September2.170.761.41October1.800.900.90November2.131.041.09December-0.320.28-0.60Sum3.42Mean0.2850Variance0.6262StandardDeviation=Trackingerror0.7913Trackingerror(inbasispoints)79.1323-16Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-2CalculationofTrackingErrorforTwoHypotheticalPortfolios:BenchmarkIstheLehmanGlobalAggregateIndex(PortfolioA)

Observationperiod=January2007–December2007;Benchmarkindex=LehmanGlobal

AggregateIndexPortfolioAMonthin2007PortfolioReturn(%)BenchmarkIndexReturn(%)ActiveReturn(%)January-0.02-0.980.96February1.582.06-0.48March-0.040.24-0.28April0.611.13-0.52May-0.71-1.560.85June-0.27-0.440.17July0.912.03-1.12August1.261.230.03September0.692.24-1.55October0.951.63-0.68November1.081.91-0.83December0.02-0.310.33Sum-3.119Mean-0.2599Variance0.5782StandardDeviation=Trackingerror0.7604Trackingerror(inbasispoints)76.0423-17Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-2CalculationofTrackingErrorforTwoHypotheticalPortfolios:BenchmarkIstheLehmanGlobalAggregateIndex(PortfolioB)

Observationperiod=January2007–December2007;Benchmarkindex=LehmanGlobalAggregateIndexPortfolioBMonthin2007PortfolioReturn(%)BenchmarkIndexReturn(%)ActiveReturn(%)January-1.05-0.98-0.07February2.132.060.07March0.370.240.13April1.011.13-0.12May-1.44-1.560.12June-0.57-0.44-0.13July1.952.03-0.08August1.261.230.03September2.172.24-0.07October1.801.630.17November2.131.910.22December-0.32-0.31-0.01Sum0.26Mean0.0217Variance0.0142StandardDeviation=Trackingerror0.1192Trackingerror(inbasispoints)11.9223-18Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies(continued)TwoFacesofTrackingError

Calculationscomputedforaportfoliobasedonaportfolio’sactualactivereturnsreflecttheportfoliomanager’sdecisionsduringtheobservationperiod.Wecalltrackingerrorcalculatedfromobservedactivereturnsforaportfoliobackward-lookingtrackingerror.Itisalsocalledtheex-posttrackingerrorandtheactualtrackingerror.

Theportfoliomanagerneedsaforward-lookingestimateoftrackingerrortoreflecttheportfolioriskgoingforward.Thewaythisisdoneinpracticeisbyusingtheservicesofacommercialvendorordealerfirmthathasmodeledthefactorsthataffectthetrackingerrorassociatedwiththebondmarketindexthatistheportfoliomanager’sbenchmark.Thesemodelsarecalledmulti-factorriskmodels.23-19Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies(continued)TwoFacesofTrackingError

Givenamanager’scurrentportfolioholdings,theportfolio’scurrentexposuretothevariousriskfactorscanbecalculatedandcomparedtothebenchmark’sexposurestothefactors.Usingthedifferentialfactorexposuresandtherisksofthefactors,aforward-lookingtrackingerrorfortheportfoliocanbecomputed.Thistrackingerrorisalsoreferredtoaspredictedtrackingerrorandex-antetrackingerror.23-20Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies(continued)TrackingError

andActiveVersuspassivestrategiesWecanthinkofactiveversuspassivebondportfoliostrategiesintermsofforward-lookingtrackingerror.Inconstructingaportfolio,amanagercanestimateitsforward-lookingtrackingerror.Whenaportfolioisconstructedtohaveaforward-lookingtrackingerrorofzero,themanagerhaseffectivelydesignedtheportfoliotoreplicatetheperformanceofthebenchmark.Iftheforward-lookingtrackingerrorismaintainedfortheentireinvestmentperiod,theactivereturnshouldbeclosetozero.Suchastrategy—onewithaforward-lookingtrackingerrorofzeroorverysmall—indicatesthatthemanagerispursingapassivestrategyrelativetothebenchmarkindex.23-21Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies(continued)RiskFactorsandPortfolioManagementStrategiesForward-lookingtrackingerrorindicatesthedegreeofactiveportfoliomanagementbeingpursuedbyamanager.Therefore,itisnecessarytounderstandwhatfactors(referredtoasriskfactors)affecttheperformanceofamanager’sbenchmarkindex.TheriskfactorsaffectingtheLehmanBrothersAggregateBondIndexhavebeeninvestigated.AsummaryoftheriskfactorsisprovidedinExhibit23-3(seeOverhead23-23).Riskfactorscanbeclassifiedintotwotypes:Asystematicriskfactorisaforcethataffectallsecuritiesinacertaincategoryinthebenchmarkindex.Anonsystematicriskfactorreferstoriskthatisnotattributabletosystematicriskfactors.23-22Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-3SummaryofRiskFactorsforaBenchmarkSystematicRiskFactorsNon-SystematicRiskFactorsTermStructureRiskFactorsNon-TermStructureRiskFactorsIssuerSpecificIssueSpecificsectorriskqualityriskoptionalityriskcouponriskMBSsectorriskMBSvolatilityriskMBSprepaymentrisk23-23Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies

(continued)RiskFactorsandPortfolioManagementStrategiesSystematicriskfactors,inturn,aredividedintotwocategories:termstructureriskfactorsandnon-termstructureriskfactors.Termstructureriskfactorsarerisksassociatedwithchangesintheshapeofthetermstructure(levelandshapechanges).Non-termstructureriskfactorsincludesectorrisk,qualityrisk,optionalityrisk,couponrisk,MBSsectorrisk,MBSvolatilityrisk,andMBSprepaymentrisk.Sectorriskistheriskassociatedwithexposuretothesectorsofthebenchmarkindex.Qualityriskistheriskassociatedwithexposuretothecreditratingofthesecuritiesinthebenchmarkindex.Optionalityriskistheriskassociatedwithanadverseimpactontheembeddedoptionsofthesecuritiesinthebenchmarkindex.Couponriskistheexposureofthesecuritiesinthebenchmarkindextodifferentcouponrates.23-24Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies

(continued)RiskFactorsandPortfolioManagementStrategiesThelastthreenon-termrisks(MBSsectorrisk,MBSvolatilityrisk,andMBSprepaymentrisk)areassociatedwiththeinvestinginresidentialmortgagepass-throughsecurities.MBSsectorriskistheexposuretothesectorsoftheMBSmarketincludedinthebenchmark.MBSvolatilityriskistheexposureofabenchmarkindextochangesinexpectedinterest-ratevolatility.MBSprepaymentriskistheexposureofabenchmarkindextochangesinprepayments.Nonsystematicfactorrisksareclassifiedasnonsystematicrisksassociatedwithaparticularissuer,issuer-specificrisk,andthoseassociatedwithaparticularissue,issue-specificrisk.23-25Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallTrackingErrorandBondPortfolioStrategies

(continued)DeterminantsofTrackingErrorOnceweknowtheriskfactorsassociatedwithabenchmarkindex,forward-lookingtrackingerrorcanbeestimatedforaportfolio.Thetrackingerroroccursbecausetheportfolioconstructeddeviatesfromtheexposuresforthebenchmarkindex.Amanagerprovidedwithinformationabout(forwarding-looking)trackingerrorforthecurrentportfoliocanquicklyassessiftheriskexposurefortheportfolioisonethatisacceptableiftheparticularexposuresarebeingsought23-26Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategiesManagerExpectationsVersustheMarketConsensusAmoneymanagerwhopursuesanactivestrategywillpositionaportfoliotocapitalizeonexpectationsaboutfutureinterestrates,butthepotentialoutcome(asmeasuredbytotalreturn)mustbeassessedbeforeanactivestrategyisimplemented.Theprimaryreasonforthisisthatthemarket(collectively)hascertainexpectationsforfutureinterestratesandtheseexpectationsareembodiedintothemarketpriceofbonds.Thoughsomemanagersmightrefertoan“optimalstrategy”thatshouldbepursuedgivencertainexpectations,thatisinsufficientinformationinmakinganinvestmentdecision.23-27Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies(continued)Interest-RateExpectationsStrategiesAmoneymanagerwhobelievesthatheorshecanaccuratelyforecastthefuturelevelofinterestrateswillaltertheportfolio’ssensitivitytointerest-ratechanges.Aportfolio’sdurationmaybealteredbyswapping(orexchanging)bondsintheportfoliofornewbondsthatwillachievethetargetportfolioduration.Suchswapsarecommonlyreferredtoasrateanticipationswaps.Althoughamanagermaynotpursueanactivestrategybasedstrictlyonfutureinterest-ratemovements,therecanbeatendencytomakeaninterest-ratebettocoverinferiorperformancerelativetoabenchmarkindex.Thereareotheractivestrategiesthatrelyonforecastsoffutureinterest-ratelevels.23-28Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies

(continued)YieldCurveStrategiesTheyieldcurveforU.S.Treasurysecuritiesshowstherelationshipbetweentheirmaturitiesandyields.Theshapeofthisyieldcurvechangesovertime.YieldcurvestrategiesinvolvepositioningaportfoliotocapitalizeonexpectedchangesintheshapeoftheTreasuryyieldcurve.AshiftintheyieldcurvereferstotherelativechangeintheyieldforeachTreasurymaturity.Aparallelshiftintheyieldcurveisashiftinwhichthechangeintheyieldonallmaturitiesisthesame.Anonparallelshiftintheyieldcurveindicatesthattheyieldformaturitiesdoesnotchangebythesamenumberofbasispoints.23-29Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies

(continued)YieldCurveStrategiesHistorically,twotypesofnonparallelyieldcurveshiftshavebeenobserved:atwistintheslopeoftheyieldcurveandachangeinthehumpednessoftheyieldcurve.Aflatteningoftheyieldcurveindicatesthattheyieldspreadbetweentheyieldonalong-termandashort-termTreasuryhasdecreased;asteepeningoftheyieldcurveindicatesthattheyieldspreadbetweenalong-termandashort-termTreasuryhasincreased.Theothertypeofnonparallelshift,achangeinthehumpednessoftheyieldcurve,isreferredtoasabutterflyshift.23-30Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies(continued)YieldCurveStrategiesFrankJonesanalyzedthetypesofyieldcurveshiftsthatoccurredbetween1979and1990.Hefoundthatthethreetypesofyieldcurveshiftsarenotindependent,withthetwomostcommontypesofyieldcurveshiftsbeingadownwardshiftintheyieldcurvecombinedwithasteepeningoftheyieldcurveanupwardshiftintheyieldcurvecombinedwithaflatteningoftheyieldcurve.ThesetwotypesofshiftsintheyieldcurvearedepictedinExhibit23-6(seeOverheads23-32and23-33).23-31Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-6CombinationsofYieldCurveShiftsYieldMaturityPositiveButterflyFlatteningParallelUpwardShift/Flattening/PositiveButterfly23-32Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-6CombinationsofYieldCurveShiftsYieldMaturityNegativeButterflySteepeningParallelDownwardShift/Steepening/NegativeButterfly23-33Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies

(continued)YieldCurveStrategiesInportfoliostrategiesthatseektocapitalizeonexpectationsbasedonshort-termmovementsinyields,thedominantsourceofreturnistheimpactonthepriceofthesecuritiesintheportfolio.Thismeansthatthematurityofthesecuritiesintheportfoliowillhaveanimportantimpactontheportfolio’sreturn.Thekeypointisthatforshort-terminvestmenthorizons,thespacingofthematurityofbondsintheportfoliowillhaveasignificantimpactonthetotalreturn.Inabulletstrategy,theportfolioisconstructedsothatthematuritiesofthesecuritiesintheportfolioarehighlyconcentratedatonepointontheyieldcurve.Inabarbellstrategy,thematuritiesofthesecuritiesintheportfolioareconcentratedattwoextremematurities.Inaladderstrategytheportfolioisconstructedtohaveapproximatelyequalamountsofeachmaturity.23-34Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies

(continued)DurationandYieldCurveShiftsDurationisameasureofthesensitivityofthepriceofabondorthevalueofabondportfoliotochangesinmarketyields.Abondwithadurationof4meansthatifmarketyieldschangeby100basispoints,thebondwillchangebyapproximately4%.However,ifathree-bondportfoliohasadurationof4,thestatementthattheportfolio’svaluewillchangeby4%fora100-basis-pointchangeinyieldsactuallyshouldbestatedasfollows:Theportfolio’svaluewillchangeby4%iftheyieldonfive-,10-,and20-yearbondsallchangeby100basispoints.Thatis,itisassumedthatthereisaparallelyieldcurveshift.23-35Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies

(continued)AnalyzingExpectedYieldCurveStrategiesTheproperwaytoanalyzeanyportfoliostrategyistolookatitspotentialtotalreturn.IfamanagerwantstoassesstheoutcomeofaportfolioforanyassumedshiftintheTreasuryyieldcurve,thisshouldbedonebycalculatingthepotentialtotalreturnifthatshiftactuallyoccurs.ThiscanbeillustratedbylookingattheperformanceoftwohypotheticalportfoliosofTreasurysecuritiesassumingdifferentshiftsintheTreasuryyieldcurve.ThethreehypotheticalTreasurysecuritiesshowninExhibit23-8(seeOverhead23-37)areconsideredforinclusioninourtwoportfolios.Forourillustration,theTreasuryyieldcurveconsistsofthesethreeTreasurysecurities:ashort-termsecurity(A,thefive-yearsecurity),anintermediate-termsecurity(C,the10-yearsecurity),andalong-termsecurity(B,the20-yearsecurity).23-36Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallExhibit23-8ThreeHypotheticalTreasurySecuritiesBondCoupon(%)Maturity(years)PricePlusAccruedYieldtoMaturity(%)DollarDurationDollarConvexityA8.5051008.504.00519.8164B9.50201009.508.882124.1702C9.25101009.256.43455.450623-37Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies(continued)AnalyzingExpectedYieldCurveStrategiesDurationisjustafirstapproximationofthechangeinpriceresultingfromachangeininterestrates.Convexityprovidesasecondapproximation.Dollarconvexityhasameaningsimilartoconvexity,inthatitprovidesasecondapproximationtothedollarpricechange.Fortwoportfolioswiththesamedollarduration,thegreatertheconvexity,thebettertheperformanceofabondoraportfoliowhenyieldschange.Whatisnecessarytounderstandisthatthelargerthedollarconvexity,thegreaterthedollarpricechangeduetoaportfolio’sconvexity.23-38Copyright©2010PearsonEducation,Inc.PublishingasPrenticeHallActivePortfolioStrategies(continued)AnalyzingExpectedYieldCurveStrategiesNowsupposethataportfoliomanagerwithasix-monthinvestmenthorizonhasachoiceofinvestinginthebulletportfolioorthebarbellportfolio.Whichoneshouldhechoose?Themanage