Reinvestment Risk vs. Price Risk
Can anyone explain to me the following 2 statements?
- If asset duration is lower than liability duration, the portfolio is exposed to reinvestment risk.
- If asset duration is higher than liability duration, the portfolio is exposed to price risk.
For the first statement, if asset duration is lower and interest rate decreases, the loss on reinvestment income will be greater than the gain on asset price. The liability will increase more than the asset, making it worse I guess? Overall it is a net loss.
Applying the same logic to the second statement, if asset duration is higher and interest rate increases, the loss on asset price will be greater than the gain on reinvestment income. But the liability will also decrease, reducing the loss? Overall it is still a net loss isn’t it? Do I even need to consider the liability here?
Thanks in advance.
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