Interest Rate Risk Mitigation in Fixed Income

Medium Asset Allocation Asset Allocation Implementation

John is a portfolio manager working for a wealth management firm. He is currently responsible for overseeing the asset allocation strategy of a client who is focused on achieving moderate growth while maintaining a balanced risk profile. The client's investment objectives include a five-year time horizon and a maximum acceptable volatility of 15% in their portfolio.

After assessing various asset classes, John considers implementing a 60/40 equity to fixed income allocation with a mix of domestic and international investments. However, he is concerned about potential interest rate hikes and their impact on bond prices. To adjust for this concern, John decides to allocate a portion of the fixed income allocation to short-duration bonds.

Which of the following strategies best describes John’s implementation approach to reduce interest rate sensitivity in the fixed income portion of the portfolio?

Increase the proportion of high-yield bonds within the fixed income allocation.

Diversify the fixed income allocation into different types of bonds, including inflation-linked bonds.

Tilt the fixed income allocation towards short-duration bonds to minimize interest rate risk.

Hint

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