Immunization Against Nonparallel shifts

CFA Level III
#1

The Portfolio that has the lowest reinvestment risk is the portfolio that will do the best job of immunization:

  • An immunized portfolio consisting entirely of zero-coupon bonds that mature at the investment horizon will have zero immunization risk because there is zero reinvestment risk.
  • If cash flows concentrated around the horizon (bullets with maturities near the liability date), reinvestment risk and immunization risk will be low.
  • If there is a high dispersion of cfs about the horizon date (barbell strategy), reinvestment risk and immunization risk will be high.

Around the horizon and about the horizon… can someone explain what they mean?

Thanks!

#2

Around and about is the same thing. In one case the dispersion is low thus low risk and the another case with the high dispersion, thus high risk.

#3

Around and about mean the same thing.

The key distinction is _ concentrated _ vs. _ high dispersion _.

#4

hmmm, got it, so concentrated is low risk and high dispersion is high risk. Seems a little backwards, when you think… isn’t it better so spread it out? Does high dispersion also mean = high uncertainty?

#5

higher dispersion = more standard deviation of returns. You get higher returns but with lower certainty - is another way of looking at it. and higher returns = higher risk => higher standard deviation.

when you have returns less dispersed around the mean - the returns are more certain, so you are better equipped to “immunize” your portfolio.