Jim Malone, CIO of Sigma bond fund had a successful track record of investing in investment grade bonds. Recently though, Sigma has been lagging its peers because Malone refuses to reduce the duration of the portfolio by purchasing short-term bonds for the fund. Malone’s actions are most consistent with:
A) Liquidity preference theory.
B) Preferred habitat theory.
C) Segmented markets theory.
Answer C. Explanation given, Under segmented markets theory investors in one maturity segment of the market will not move into any other maturity segments.
I failed to connect the explanation and question. Can anybody please help.
Because sometimes, they have the obligation to purchase bonds of certain maturity, like pension and insurance companies due to asset-liability matching reasons, they prefer to buy long term bonds, similarly, Malone may have some obligations which obliges him not to reduce the duration of the portfolio, which is consistent with Segmented Markets THEORY.
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Thanks Pallavi