Question:

In this unit we learned to relate the differences between passive and active portfolio management, use duration and convexity to measure the interest rate sensitivity of a bond or bond portfolio, break down bond portfolio returns and use conventional approaches to adjust for risk, and analyze a bond portfolio manager's performance.

Lets extend the discussion by examining the practical implications of these concepts. Millennium Cerberus Fund is now reviewing its overall bond allocation strategy following the recent " liquidity squeeze" in the financial markets. As an analyst for the fund, you note that the correlation of the rate of return between Treasury bills and high- grade corporate bonds is high ( 0.95), whereas the correlation between Treasury bills and high- yield ( i. e., junk) bonds is relatively low ( 0.52).

Here is the question u need to anser

How would such a disparity affect your bond portfolio allocation?