Inside the Yield Book: The Classic That Created the Science of Bond Analysis, 3rd Edition

Introduction

The standard approach to the analysis of prospective returns and risks of any portfolio combines some estimate of expected returns with a measure of interim volatility. For bonds, volatility is approximated by the product of the yield volatility and the duration. The yield move (and corresponding return) in any one period usually is presumed to be statistically independent of previous yield moves.

At first, the standard return/risk approach appears to provide a reasonable basis for projecting multiperiod returns and risks. However, with duration-targeted (DT) portfolios, where the same duration is maintained over time, returns converge back toward the initial yield, so the multiyear volatility turns out to be far less than that suggested ...