Bridge over ocean
1 January 1994 Financial Analysts Journal Volume 50, Issue 1

Dynamic Diversification of Fixed Income Portfolios

  1. John M. Mulvey, PhD
  2. Stavros A. Zenios
A systematic and practical approach for diversifying a portfolio of fixed-income securities blends forward-looking simulations of the term structure of interest rates with traditional concepts from equity management. The objective is to form a well-diversified portfolio, one that is robust to anticipated changes in interest rates and other uncertainties.To achieve this objective, the dynamic effects must be jointly modeled so that security correlations (comovements) can be estimated. Once a covariance matrix is constructed, traditional methods of portfolio management can be employed. The concepts apply to a wide variety of fixed-income areas, including the high-yield sector and mortgage-backed securities.
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