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Bond portfolio optimization: A risk-return approach

  • Korn, Olaf
  • Koziol, Christian
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    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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    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 9780521411462, October.
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