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The article reports on immunization of portfolios. Immunization allows the guarantee of a minimum return performance over a specified investment horizon despite unknown interest rate movements. Bond portfolios are immunized through the existence of an absolute lower bound on the portfolio's value at the end of the intended holding period and if the lower bound equals the value that would occur if the actual rates of the holding period equal the expected rates at the time of purchase. Interest in immunization is due to the desire of bond managers to reduce the risk accompanying interest rate movements.

There are three main advantages to the use of futures contracts on financial instruments to modify the interest rate sensitivity of immunized portfolios. First, managers can immunize for distant horizons that exceed the longest duration available in the cash market. Second, they can undertake cash market transactions and then modify the duration of the portfolio as necessary with the use of futures, rather than being constrained to choose from among immunized combinations of cash market instruments. Finally, they can use futures to rebalance more precisely and at less cost, when yield changes and maturation cause the duration of a portfolio to differ from the desired value. The relationship between interest rate risk, duration and immunization are discussed.

This article intends to examine the impact of investor's holding period (HP) on the riskiness of fixed-income securities with varying maturities. Although many observers consider longer-term securities to be riskier than shorter-term securities, this assumption is superficial and potentially misleading. Short-term securities can be excessively risky for investors with long holding periods, just as long-term securities can be excessively risky for investors with short holding periods. The choice of a risk measure that can be generalized for different holding periods is more difficult than one might expect. This uncertainty is related to the potential for unanticipated changes in the rate of return over the holding period. In order to obtain a statistical measure of an asset's risk, several consecutive HPs, the absolute value of the asset's unanticipated return, have been averaged over. For any HP, an estimate of the actual annualized rate of return has been obtained. The effect of maturity on risk has been studied extensively for a short holding period.

The article discusses use of capital asset pricing model (CAPM) for measuring the risk-return performance of the U.S. government bond market. There appears to be a systematic tendency for longer maturity bonds to offer lower yields than would be expected given their exposure to interest rate risk. The purchase yield, the yield to maturity at time of purchase, is a better estimate of expected return than actual return. There are several characteristics of the government bond market that makes it well suited as a vehicle for applying the CAPM. The CAPM is specified in terms of a security's expected return. Since government bonds are not normally included in the computation of the market index employed in the CAPM, this may provide a stronger test of the model than those studies which are confined to the equity market.

This article examines the appropriateness of average maturity as a risk proxy for portfolios of government bonds. Many portfolio managers tend to use average maturity as a summary risk measure for their government and municipal bond portfolios. Policy statements from financial institutions are commonly couched in terms of "shortening" or "lengthening" average maturity in their bond portfolios. In some cases, limits on average maturity are set in an attempt to insure at least a minimum liquidity. One phenomenon is most important for an understanding of the investment opportunities available from different maturity government bonds the nonlinearity of the risk-maturity relationship. For the purposes of this study, a bond's risk is taken to be its average change in price over assumed one-month holding periods. The use of monthly observations to compute risk and return estimates is common in most of the literature in portfolio management. A second factor that contributes to the observed curvilinear risk-maturity relationship is the consistent tendency of yield volatility to decrease with bond maturity.

In this paper the usefulness of "duration" as a risk measure for fixed-income securities is considered. It is concluded that while duration can be useful under certain circumstances, one must exercise caution not to overstate its generality. As will be discussed later in the paper, it is felt that the academic community has overstated the attributes of duration and, as a result, practitioners are employing duration in selection and evaluation models for which it is ill suited. It is hoped that the discussion presented here will serve the purpose of causing the profession to step back and consolidate the substantial progress that has been made recently in the area of fixed-income research and to develop a more robust approach to solving the problems of bond management. In recent years, the academic community and professional bond managers seem to have rediscovered the duration concept. Researchers have been interested in the usefulness of duration in several different applications, all of which are related to duration as a risk or price variability measure of some sort. Duration-based models have been developed 1) to index bond funds, 2) to select under-valued fixed-income securities, 3) to immunize the value of a portfolio against changes in interest rates, and 4) to evaluate the performance of portfolio managers. In addition, it has been suggested that conventional yield curves be redrawn in terms of duration rather than maturity in order to furnish better information on risk-return opportunities. With few exceptions, the existing literature has ignored the critical nature of certain assumptions underlying the use of duration measures. As a result, it is felt that many of the current applications of duration to bond management are at least incomplete and in some cases incorrect. Section I defines duration and demonstrates how it can be used to relate yield changes and price changes of various fixed-income securities. In Section II the various uses of duration as a risk measure for individual securities are discussed. This discussion is broadened in Section III which considers the contribution of a single security to the risk of a portfolio in which it is held. The implications of the findings for current applications of duration-based models are presented in Section IV. This paper is concluded with a brief summary and suggestions as to how the profession might proceed in future research and applications. [ABSTRACT FROM AUTHOR]

The article presents authors's reply to comments made by Christopher James on an article written by the author, regarding the use of capital asset pricing model (CAPM) in analysing the relationship between the firm's behavior in the product market and capital market conditions. Authors justify their use of CAPM of partial equilibrium analysis. In the two cases discussed by James, these authors assume that the firm adds its new output to the market portfolio when determining optimum investment. James states that this procedure violates the perfect capital market assumption of the CAPM, but he seems to confuse the nature of competition in the product markets on the one hand and in the capital market on the other. Although James' assumption that the value of the market portfolio is fixed makes sense if product markets are perfectly competitive and at a long-run equilibrium, competition in the capital market is compatible with less restrictive conditions. Analysis of the investment decision in long-run equilibrium is of little interest, since there are no incentives to invest.