Gifford Fong Associates and Dimensional Credit Corporation, respectively.
A Risk Minimizing Strategy for Portfolio Immunization
Article first published online: 30 APR 2012
1984 The American Finance Association
The Journal of Finance
Volume 39, Issue 5, pages 1541–1546, December 1984
How to Cite
FONG, H. G. and VASICEK, O. A. (1984), A Risk Minimizing Strategy for Portfolio Immunization. The Journal of Finance, 39: 1541–1546. doi: 10.1111/j.1540-6261.1984.tb04923.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Consider a fixed-income portfolio whose duration is equal to the length of a given investment horizon. It is shown that there is a lower limit on the change in the end-of-horizon value of the portfolio resulting from any given change in the structure of interest rates. This lower limit is the product of two terms, of which one is a function of the interest rate change only, and the other depends only on the structure of the portfolio. Consequently, this second term provides a measure of immunization risk. If this measure is minimized, the exposure of the portfolio to any interest rate change is the lowest.