Duration Matching Strategy for Pension Fund

Hard Liability-driven Strategies Duration Matching

After conducting a thorough analysis of its liabilities, a pension fund manager has decided to implement a liability-driven investment strategy with a focus on comprehensive duration matching. The goal is to ensure that the duration of the liabilities aligns closely with the duration of the fixed income portfolio.

The pension fund has a long-term liability with an average duration of 12 years. The manager has identified several investment options across different segments of the bond market. The goal is to construct a portfolio where the weighted average duration of the fixed income investments will closely match the liability duration.

Which of the following fixed income strategies is most likely to achieve the objective of duration matching for this pension fund?

Investing primarily in short-term corporate bonds with an average duration of 5 years.

Creating a laddered bond portfolio composed of government securities with durations spanning from 10 to 15 years.

Allocating funds exclusively to long-term zero-coupon bonds with a duration of 12 years.

Hint

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