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Risk and Return Characteristics of Lower Grade Bonds

Author

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  • Marshall E. Blume
  • Donald B. Keim

Abstract

Particularly since the passage of ERISA, institutional investors have increasingly been willing to consider investments that traditionally have been considered highly speculative. Indeed, some institutional investors now routinely use options and futures, instruments that formerly were viewed as highly speculative and thus inappropriate investments. The rationale is that these instruments, although risky if viewed alone, provide, in combination with other assets, portfolios that overall are conservative (witness the writing of covered calls). The purpose of this paper is to examine the risk and return characteris-tics of lower-grade corporate bonds. Institutional investors have frequently considered such bonds as inappropriate for a conservative portfolio. However, if diversification eliminates much of the risk of individual bonds, lower-grade bonds might have an appropriate place in a conservative portfolio. Whether they do or not depends upon their prospective risk and return characteristics. The usual starting point for judging the prospective characteristics of an investment is a detailed analysis of historical data, the subject of this paper.

Suggested Citation

  • Marshall E. Blume & Donald B. Keim, "undated". "Risk and Return Characteristics of Lower Grade Bonds," Rodney L. White Center for Financial Research Working Papers 17-87, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:17-87
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