The Research On Bond Portfolio

The emergence and development of Markowitz modern portfolio theory provide anefficient risk management tool for financial market and promote the improvement andthe perfection of financial system. However, the theory is base on the stock-typeassets and, for bond-type assets, a new way is required to find. The uncertainty offuture value of a stock-type asset increases along with the increase of time. But, for abond-type asset, because of the fixed maturity date, the uncertainty of future valuedecreases along with the increase of time (if unconsiderring the default risk). Theseessential differences result in that the Markowitz portfolio theory can not directly beused in bond market, and this is the difficulty to investigate the bond portfolio.The risk of bond-type assets comes from the default and the change of interest rate.This paper focuses on the issues regarding to the interest rate risk for bond portfolio.As a traditional duration immunization strategy, it is only efficient in the case that theyield curve is level and the interest rate risk is from the shift of the yield curve. By thefurther analysis and discussion for the change rate of the immunized portfolio, thepaper gives the lower bound and obtains some significant results, and then builds abond portfolio model. The model is simple and is easy to solve. On one hand, themodel is try to get higher return when the yield cure shifts; On the other hand, themodel is try to keep the lower bound as big as possible when the cha nge of the yieldcurve is not a translation. From this, the interest rate risk is managed.