Maturity variance

[cfa09]

Is this something we need to know ?
mentioned in Schweser .

 

[ilvino]

Is this related to mulitple liability immunization, or is this something entirely different?
either way, multiple liablity immuniz:
1) PV of assets must equal PV of liabilities
2) Duration of assets must equal Duration of liabilities
3) the distribution of durations of the assets should be greater than the distribution of the liability durations

 

[passthismofo]

Ilvino, isn’t this the strategy for multiple liability immunization or am I losing it?

 

[ilvino]

mofo, you are wise and I am losing it. Thanks for the pointer

 

[landrybj]

All they are saying is for immunization to be most effective, you want to minimize maturity variance. A zero coupon bond maturing on the day the liability is due, is most effective, followed by a portfolio of coupon bonds tightly clustered around the liability date, followed by a more disperse portfolio of bond maturities.

 

[passthismofo]

ilvino Wrote:
——————————————————-
> mofo, you are wise and I am losing it. Thanks for
> the pointer
Way to much info in the curriculum to keep things straight. One thing in, ten out!

 

[ilvino]

good call landry, like pointing out the difference between a barbell or a bullet strategy. A barbell, with its wide maturity variance, has more reinvestment risk and is less effective at immunization, while a bullet portfolio clustered around the liability maturity has much less reinvestment risk and is more effective at immunization.

 

[Magix]

got covered above.
maturity variance i think is related to the dispersion of the asset maturities around the liability maturity. the manager will attempt to keep this to the minimum so that the immunized portfolio works better. it works better because the closer the distributions of asset maturities to the liability maturity the lower the reinvestment risk.
key point: the lower the maturity variance the lower the immunization risk.

 

[Dwight]

Very intuitive - thanks.