Assess Asset allocation decision and security selection strategies - Assignment Example

at he will sell the ownership of the undervalued shares that he holds, borrow loan at an interest rate equivalent to his shareholding in that firm and then buy shares of equivalent proportion in the market. An arbitrage profit is obtained. I would recommend a duration of shorter duration of 3 years. This is due to the fact that a portfolio with low duration is ideal since the level of interest rate risk is low as compared to high duration portfolios. Immunization in the context of bond portfolio refers to an approach which matches the period of the firm’s assets and liabilities with a view of reducing the effect of interest rates on the total net worth of the firm.

The institution should invest in equal proportions of both bond A and B as this will help to offset the interest rate and the risk so as to immunize the portfolio. Is the interest rates increases from 7% to 8% the institution might consider interest rate risk that is duration shifting which implies that portfolio duration can only be reduced by incorporating bonds that have a short maturity period or those with a high coupon