schweser says yes, CFA sample 3 says no.
No. Return Maximization is when you try to outperform classic immunization with stuff like barbell portfolio (Classic immunization still holds, but you opt to trade increased return for YC Risk)
classic immunization = matching durations, right?
mathcing duration and PV
I got that question wrong too. It’s weird because with contingent immunization you set the minimum acceptable return but you try to get a higher return , is’t that return maximization? Otherwise why not just immunize? what’s the purpose of contingent immunization then?
comp_sci_kid Wrote: ------------------------------------------------------- > mathcing duration and PV isn’t that multiple liability immunization?
former trader Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > mathcing duration and PV > > > isn’t that multiple liability immunization? now that is classical. Multiple adds that dispertion of durations (cashflows) must be wider then that of liability
to sum up: classical: match duration and PV contingent: mix of active and passive multiple: match PV, duration and envelope liabilities with assets horizon= multiple + cash flow return maximization = classical + (barbell/bullet, etc.) ?
former trader Wrote: ------------------------------------------------------- > to sum up: > > classical: match duration and PV > contingent: mix of active and passive > multiple: match PV, duration and envelope > liabilities with assets > horizon= multiple + cash flow > return maximization = classical + (barbell/bullet, > etc.) > > ? looks good, except that i really dont know how to describe contigent. Dont forget about general cash flow matching - where you treat inflows as cashflow
Return maximization is most sophisticated of all (something similar to Monte Carlo Simulation) it takes the contingent immunization concept of cushion spread, uses computers / linear programming to come up with an efficient frontier of immunized portfolios.
unrelated question: barbell portfolio has less credit risk than bullet portfolio?
depends if its a bullet corp or bullet gov. Long bullet corp yes, long bullet gov no.
former trader Wrote: ------------------------------------------------------- > unrelated question: > > barbell portfolio has less credit risk than bullet > portfolio? No. more money is outstanding at the long end of the barbell. Hence higher credit risk.
busy_people Wrote: ------------------------------------------------------- > former trader Wrote: > -------------------------------------------------- > ----- > > unrelated question: > > > > barbell portfolio has less credit risk than > bullet > > portfolio? > > No. more money is outstanding at the long end of > the barbell. Hence higher credit risk. INCORRECT. Barbell portfolio usualyl constructed with T-bonds at the long end
former trader Wrote: ------------------------------------------------------- > to sum up: > > multiple: match PV, duration and envelope > liabilities with assets Avg duration should match + distribution of individual asset durations should envelope the corresponding liab duration. Is PV matching needed ?
yes. it’s one of the 3 requirements
comp_sci_kid Wrote: ------------------------------------------------------- > busy_people Wrote: > -------------------------------------------------- > ----- > > former trader Wrote: > > > -------------------------------------------------- > > > ----- > > > unrelated question: > > > > > > barbell portfolio has less credit risk than > > bullet > > > portfolio? > > > > No. more money is outstanding at the long end > of > > the barbell. Hence higher credit risk. > > INCORRECT. > > Barbell portfolio usualyl constructed with T-bonds > at the long end CSK, you are referring to Credit barbell - used to manage portfolio credit risk. I am referring to barbell used to manage non-parallel interest risk.
busy_people can you please point me to page in CFAI books that talk about ‘credit barbell’ as oppose to regular barbell?
former trader Wrote: ------------------------------------------------------- > yes. it’s one of the 3 requirements FT, page 351, volume3 textbook mentions only 2 requirements as ‘necessary and sufficient condition’ for multiple liab immuniztion: Match duration + wider range of asset duration distribution. PV matching is not mentioned.
comp_sci_kid Wrote: ------------------------------------------------------- > busy_people can you please point me to page in > CFAI books that talk about ‘credit barbell’ as > oppose to regular barbell? Volume 3 Page 391: credit barbell Page 349: barbell (regular)