Portfolio Immunization

Agree or disagree with the following statement and explain your answer: “As long as a portfolio manager matches the duration and convexity of a portfolio to the liability, whether he uses a ‘barbell strategy’ or a ‘bullet strategy’ should make no difference.”

Disagree: Bullet strategy is preferable to barbell strategy owing to the likelihood of key rate duration mismatch, reinvestment risk and price risk in case of a barbell strategy as compared to a bullet strategy.

I agree with GetSetGo. Secret Sauce uses M^2 measure (“maturity variance which is the variance of the differences in the maturities of the bonds used in the immunization strategy and the maturity date of the liability”). Smaller M^2 is preferrable due to reinvestment and interest rate risk.

Concur.

Immunization can be achieved most effectively when the cashflow occure at the same time. So, using a bullet structure can be better to match the timing of the liability.

Taken to an extreme, a zero coupon bond would have zero variance from the liability date and no risk as an immunization strategy.

Concur!!

Your Concur was more exciting than mine, ws. Do you CONCUR!!!

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CONCUR! *runs away*

I concur too.