A cash flow matched portfolio: A: Usually more difficult to construct than an immunized portfolio, but it is easier to maintain after it has been constructed B: Usually more expensive to maintain than an immunized portfolio after it has been constructed C: Can be easily changed after it has been constructed
I think it’s B. It’s simplier to construct but more expensive,
Answer is “A”. More difficult to maintain immunization compared to cf matching.
B except for the addition of after constructed and they are focused on …once constructed a cashflow matching method is cheaper to maintain that immunization… so I say A …
A: Usually more difficult to construct than an immunized portfolio, but it is easier to maintain after it has been constructed
B, the book (Vol 4, p.46) clearly indicates that immunized portfolio requires less money to fund liabilities. On the same page, it says that cash flow is easier to understand but does not say that it is easier to maintain. While cash flow matching is probably more robust and flexible strategy, owning bunch of zero coupons (immunized portfolio) is not difficult to maintain. Let me know what you guys think.
Since immunization is related to duration and duration changes, I don’t think this is easy to maintain. Once you have matched actual cash flows, you shouldn’t have to do anythng else.
Once a portfolio has been immunized, no more action is needed from the portfolio manager. The only relevant cash flow at that point is the one at horizon date. CF matching, on the other hand, is more costly and harder to maintain. Coupons have to be constantly reinvested and used (along with principal of other maturing bonds) to pay down liabilities as they come due. It’s easier to understand but it’s not easier to maintain.
To quote Scheweser notes, “Since it is unlikely that the cash flows from a bond portfolio will exactly match the liabilities, reinvestment risk is inherent in cash flow matching. As such, a minimum-risk immunization approach to funding multiple liabilities is at least equal to cash flow matching, and probably better, since it would be less expensive to fund a given stream of liabilities” I’m more certain that the answer is B.
That was my answer originally. B
You have to keep rebalancing an immunized portfolio.
I say B. How likely is it that you will cash flow match with nothing but zero-coupons?? Only in this case would the upkeep be less time consuming and expensive. IMHO the root of this question lay in the “easier to maintain” statement. They are going for the sucker that thinks “match the cash flows and then your done! easy!.” Remember that a match at first is not matching later due to convexity and duration. I say B B B.
xelak73 Wrote: ------------------------------------------------------- > To quote Scheweser notes, “Since it is unlikely > that the cash flows from a bond portfolio will > exactly match the liabilities, reinvestment risk > is inherent in cash flow matching. As such, a > minimum-risk immunization approach to funding > multiple liabilities is at least equal to cash > flow matching, and probably better, since it would > be less expensive to fund a given stream of > liabilities” > > I’m more certain that the answer is B. I think the test will be out of the CFAI text not Schweser. To quote CFAI Text: Page 48: “Monitoring an immunized or cash flow–matched portfolio requires periodic performance measurement.” further down the page: “The performance of a multiple liability immunized plan can be monitored most easily by comparing the current market value of the assets with the present value of the remaining liabilities.” And regarding cost of cash flow matching, on page 44-46, “an immunization strategy would require less money to fund liabilities.” Its B.
still say A
It should be B