My question is from reading 12 Liability driven and index based strategies.
In CFA core reading it is written (check the attached image) that ‘compared to barbell, laddered portfolio has much less cash flow reinvestment risk’
Is this statement correct ?
In my opinion, as the laddered portfolio gets cash flow (from matured bonds) at regular intervals (which are reinvested at prevailing rate), ideally the laddered portfolio should have higher reinvestment risk.
Can anyone help me with this ?
Yes, it is correct. The Laddered Portfolio always lies in between the Barbell and the Bullet, when speaking of Re-investment risk, i.e. Barbell>Ladder>Bullet , when talking about Reinvestment Risk. The explanation for the same is : laddering a portfolio means spreading your entire amount/exposure into various maturities. So, lower amount is exposed to a lower interest rate risk on every maturity. However, when looking at a Barbell Portfolio, the entire portfolio is is divided into the short and the long term rates. When the short term bond matures, the a way bigger amount ( than the laddered portfolio) is exposed to a lower interest rate risk.
Thanks !