Return Maximization in Immunized Bond Portfolios
The general purpose of portfolio immunization is risk reduction. In some cases, however, earning an additional return can more than compensate for increased volatility.
For example, an investor may be able to immunize a portfolio to a 6.0% return, or to accept a 6.5% return with a 95% confidence interval of 50 basis points. In such a case, 19 times out of 20 the latter strategy would result in a greater return than the immunized portfolio, and the investor may be willing to accept the risk.
The minimum acceptable return would be determined by the required terminal value, plus a safety margin called the cushion spread. This strategy immunizes the lower bound of the confidence interval limit on realized returns.
For more information, see all articles on: Asset Allocation, FInancial Planning, Fixed income investments, Investing in bonds, Investment Returns, Portfolio Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
