does bullet portfolio contains only ZCB ? just getting little confused.
and another doubt is –
Greater the convexity, greater the dispersion which i understand .
but ZCBs have highest convexity .(even they have 0 dispersion bcz cash flows are not dispersed at all )
Tell me if i am thinking in wrong direction
1) A bullet portfolio is when you put your entire money into a single maturity. Putting your entire money into a ZCB is one of the prominent examples of a bullet portfolio. You may put your money in a short term ZCB and a long term ZCB…that’d be a barbell portfolio. You may spread your money across maturities of a ZCB …in that case it’d be a laddered portfolio. So it’s not the instrument you’re using to create the portfolio, but the way you’re investing your money across maturities.
2) Greater the dispersion of cashflows, higher the convexity.
You’re getting confused once again. It’s about the portfolio and not the instrument. If you create a PF of ZCB as a ladder, it’ll have dispersed cashflows and higher convexity than a ZCB bullet.
oh i got this .so can i relate this with single liability immunization , where one condition is –
least convexity
because i was confused with this word “least” . because ZCBs have highest convexity which is our liability side , so i was thinking that how can we put asset’s convexity LEAST i.e less than that of liability.
please clear ???