ABSTRACT
INTRODUCTION In this chapter, we will employ some of the techniques discussed in the previous chapter to build and manage bond portfolios. Specifi cally, the insight on interest rate risk is very important for applying two basic bond portfolio strategies, passive and active. As discussed previously, when a portfolio manager adopts a passive approach to investing he or she takes the prices of assets (securities) as given (determined) by the market. The manager makes no attempt to beat the market by searching for additional information, instead trying tries to maintain a balance between risk and return of the portfolio’s holdings. By contrast, in pursuing an active investment strategy, the manager attempts to outsmart the market and realize superior returns by exploiting information. Active portfolio managers also engage in forecasting and timing of the market in order to identify those equity sectors that are expected to outperform or those bonds that are mispriced, formulating their strategies accordingly. Naturally, within the various active bond investment strategies, special cases are available to manage and/or protect a portfolio, such as immunization and other competing active strategies, such as matched-funding techniques.
