The objectives for the domestic bond portfolio include the ability to fund future liabilities, protect interest income from short-term inflation, and minimize the correlation with the fund’s equity portfolio. The correlation between the fund’s domestic bond portfolio and equity portfolio is currently 0.14. Celia plans to reduce the fund’s equity allocation and increase the allocation to the domestic bond portfolio. She reviews two possible investment strategies.
Strategy 2 is most likely preferred to
Strategy 1 for meeting the objective of:
protecting against inflation.B.
funding future liabilities.C.
minimizing the correlation of the fund’s domestic bond portfolio and equity portfolio.
Correct Answer: A
A is correct. Floating-coupon bonds provide inflation protection for the interest income because the reference rate should adjust for inflation. The purchase of fixed-coupon bonds as outlined in Strategy 1 provides no protection against inflation for either interest or principal.
Strategy 1 would instead be superior to Strategy 2 in funding future liabilities (better predictability as to the amount of cash flows) and reducing the correlation between the fund’s domestic bond portfolio and equity portfolio (better diversification).
a modified duration of one month and a correlation coefficient with the equity portfolio of -0.10. 这句话和题目中的那个CORRELATION 的话 能展现出什么特征呢