Understanding Bond Indexing in Liability-Driven Strategies

Very Easy Liability-driven Strategies Indexing

In a liability-driven investment strategy, investors often seek to match their investment returns with their future liabilities. One common approach to achieve this is through bond indexing, which involves constructing a portfolio that closely tracks a specified bond index.

Consider a pension fund that is focused on ensuring it can meet its future payment obligations. The fund is considering using a bond indexing approach to manage its fixed income portfolio. Which of the following statements best describes bond indexing as a strategy in this context?

Bond indexing allows the fund to achieve higher returns than the index by actively managing security selection.

Bond indexing enables the fund to maintain a risk profile similar to that of its liabilities through systematic replication of the index.

Bond indexing is primarily concerned with maximizing short-term gains rather than matching long-term liabilities.

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