This may be an easy and dumb Q to ask. Page 39 , vol 4 CFA text Can someone please explain this concept. " If portfolios have durations equal to horizon length, portfolio’s are immune to parallel rate changes" How can you equate bond duration with time horizon ?? duration is Change in price per 1% change in Yield and time horizon is measured in periods.
if portfolio duration = horizon length, then price risk and reinvestment risk exactly offset each other for small parallel shifts in ield curve and portfolio is effectively immunized for small parallel changes. if portfolio duration is SHORTER than horizon length, then price risk < reinvestment risk. eg if intrates rates are decreasing, bond prices will rise and reinvestment income will decrease but by a larger amount. net impact will be a decline in overall immunization position and portfolio will be exposed to reinvestment risk. if portfolio duration is LONGER than horizon length, then price risk > reinvestment risk. if intrates rates are increasing, bond prices will decline and reinvestment income will increase but by a smaller amount. net impact will be a decline in overall immunization position and portfolio will be exposed to price risk.