Ladder Portfolio

CFA Level II
#1

ELAN makes a note saying “an increase in short term rates would cause the most significant reduction in the value of a ladder portfolio…”

I’m confused, is this an error? I understand a ladder portfolio as having maturities evenly distributed thereby hedging risk. Why would short term rates cause a greater reduction than barbell or bullet?

#2

bump…any feedback would be appreciated

#3

The ladder portfolio has more stuff maturing in the short term than the others. So it would be more affected.

#4

What if the peak of a bullet portfolio was short term, or a barbell having one of its ‘barbell ends’ in the short term?

#5

Was this just a stand alone note or was it attached to a specific example?

#6

Standalone…page 13 in the Term Structure notes.

And I still don’t get it…why would it lose more than a barbell?

#7

This statement is made in the context of a given key rate duration/non parallel shift examle Tulips. As highlighted above the barbel could have suffered the most significant decline in value if it was more tilted towards the short term maturities ( as in having the largest key rate duration here). In this special case it is the ladder portfolio, but it doesn’t mean that it’s the rule in general, but correct me if I am wrong…

#8

@1logic: No peak of a bullet portfolio can never be short term as they have greater weight concentrated in the intermediate maturity relative to short and long term maturity sectors. They would be least affected of all by the increase in short term rates.

#9

Its been a while since I’ve read FI, but I was thinking that the only criteria of a bullet portfolio was a concentration in a specific maturity, so if portfolio was mostly short term bonds, but had a few mid and long maturity bonds it would still be considered a bullet portfolio. I could definitely be wrong though. What would that portfolio be classified as if its not considered a bullet portfolio?

#10

I just referred to FI…(Pg 224/CFAIVol5)

Ladder: The portfolio in terms of $mkt values is spread evenly across different maturities 2 -30yr

Barbel: More short (5) and Long (20) ; Less in Medium

Bullet: More $ concentrated in the Medium maturities 10yr etc

Now per this construction, inc short term rates (5yrs or less) => will effect Barbel more than Bullet based on $amts in those maturities.

#11

I’m not sure what name we can give to that kind of portfolio. Must be a barbell with one bell missing or a golf club! LOL

#12

Thanks for the feedback guys, this helped to clarify!

#13

I like golf club, we can go with that.