Advanced Diploma of Financial Planning (ADFP) Practice Test

Which strategy is not typically associated with immunization of bond portfolios?

1. Diversification strategy

2. Ladder strategy

3. Barbell strategy

4. Bullet strategy

The correct answer is: Diversification strategy

The strategy that is not typically associated with the immunization of bond portfolios is a diversification strategy. Immunization is a technique used by bond investors to manage interest rate risk and ensure that the investment can meet its future cash flow needs. It involves matching the duration of the bond portfolio with the investment horizon, ensuring that changes in interest rates will not adversely affect the expected outcomes. The ladder strategy, barbell strategy, and bullet strategy are all recognized methods of structuring a bond portfolio to achieve immunization. - The ladder strategy involves investing in bonds with varying maturities, providing a balanced exposure to different interest rate environments and enhancing cash flow flexibility. This method can help achieve immunization by staggered maturities leading to minimized reinvestment risk. - The barbell strategy combines short-term and long-term bonds, providing cash needs in the near term while also capturing the higher yields offered by longer-term bonds. This design can adjust the overall portfolio duration to match the investor's needs effectively. - The bullet strategy involves concentrating maturities at a specific point in time, which can match cash flow requirements more precisely to future liabilities, effectively aligning portfolio duration and cash flow structure. In contrast, while diversification helps mitigate risks across various investments, it does not specifically align