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Bond portfolio optimization: A risk-return approach

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  • Korn, Olaf
  • Koziol, Christian
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    Abstract

    In this paper, we apply Markowitz's approach of portfolio selection to government bond portfolios. As a main feature of our analysis, we use term structure models to estimate expected returns, return variances, and covariances of different bonds. Our empirical study for the German market shows that a small number of risky bonds is sufficient to reach very promising predicted risk-return profiles. If the number of risky bonds in the portfolio is not too large and the term structure model does not contain more than two factors, these predictions are confirmed by the realized risk-return profiles. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-03.

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    Date of creation: 2006
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    Handle: RePEc:zbw:cfrwps:0603

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    1. Gourieroux,Christian & Monfort,Alain, 1997. "Time Series and Dynamic Models," Cambridge Books, Cambridge University Press, number 9780521423083, October.
    2. Gourieroux,Christian & Monfort,Alain, 1997. "Time Series and Dynamic Models," Cambridge Books, Cambridge University Press, number 9780521411462, October.
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    Cited by:
    1. Galvani, Valentina & Landon, Stuart, 2011. "Riding the Yield Curve: A Spanning Analysis," Working Papers 2011-19, University of Alberta, Department of Economics.
    2. Iliya Markov & Rodrigue Oeuvray & Nils Tuchschmid, 2013. "Non-fully invested derivative-free bond index replication," Financial Markets and Portfolio Management, Springer, vol. 27(1), pages 101-124, March.
    3. Keita Nakayama & Akihiko Takahashi, 2007. "A Factor Allocation Approach to Optimal Bond Portfolio," Asia-Pacific Financial Markets, Springer, vol. 14(4), pages 299-324, December.
    4. Keita Nakayama & Akihiko Takahashi, 2008. "A Factor Allocation Approach to Optimal Bond Portfolio," CIRJE F-Series CIRJE-F-547, CIRJE, Faculty of Economics, University of Tokyo.
    5. Keita Nakayama & Akihiko Takahashi, 2007. "A Factor Allocation Approach to Optimal Bond Portfolio," CIRJE F-Series CIRJE-F-494, CIRJE, Faculty of Economics, University of Tokyo.

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