Chapter 11 - Portfolio Construction Flashcards
Three types of credit risk
Default risk
Downgrade risk
Credit spread risk
What is immunisation?
A passive management technique used by bond managers with a known future liability to meet
What are the two techniques for immunisation?
Cash matching: constructing a bond portfolio where the coupon and redemption payments are synchronised to those of the liabilities of the portfolio
Duration based immunisation: involves constructing a bond portfolio with the same initial value as the present value of the liability it is designed to meet, as well the same duration as the liability
Two types of bond switching…
Substitution: involves switching between bonds with same maturity and credit quality but differ in both price and yield
Pure yield: involves switching out of a similar bond into a bond with a greater yield to maturity
What 4 reasons may cause a policy switch for bond investors?
Changes in IR
Changes in the yield curve
Changes in credit ratings
Sector relationships
When a fund manager determines a long-term asset allocation in a portfolio based on the client’s objectives, this is an example of:
Strategic asset allocation
The adviser is looking to explain investment risk to the client, compare alternative strategies and recommend a portfolio of suitable investments. This can typically be achieved by using:
Stochastic Modelling
