Horizon Analysis
Candlefocus EditorThe analysis takes into account the discounted rates of return of each bond, which considers the time value of money due to the security's expected future cash flows and their associated present values. Horizon analysis also assumes that the risk of holding each bond remains the same over the time horizon.
When constructing a portfolio, a portfolio manager must consider the bond's risk, yield, maturity and liquidity preferences. These criteria must be taken into consideration to determine which bonds provide the highest return over the chosen period.
Horizon analysis also takes into account the correlations between the performance of the bonds in the portfolio, which can help a portfolio manager decide upon the optimal mix of securities to achieve the greatest return.
By using horizon analysis, a manager can test different scenarios to create a portfolio of bonds that will provide the highest cumulative return over the given time frame. This is especially useful for creating portfolios aimed at meeting long-term goals.
In conclusion, horizon analysis allows a portfolio manager to construct a portfolio that will meet their performance goals and risk tolerances. It is an important tool in creating long-term investment strategies, as it allows the manager to analyze how different scenarios would affect the portfolio’s performance over the desired time frame.