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Portfolio Gap Analysis
Fixed Income Risk Analysis
Potential Quality Gap
Potential Maturity Gap
Fixed Income Risk
The primary role of fixed income in a portfolio is to dampen portfolio volatility. There are two
primary risk factors that contribute to the level of volatility in fixed income: term (maturity) and
credit quality. Generally as the maturity of a bond increases, interest rate risk increases, and as the
credit quality of a bond decreases, default risk increases. Fixed income risk and volatility are therefore
minimized with short term and high quality securities.
Longer maturities and lower credit qualities can potentially yield higher returns, however based on
historical data from 1964 to 2015, incremental returns have not been commensurate with the
additional risk taken.
Speculative
Extended
Core
Shortest Longest
Duration
Highest Lowest
Credit Quality
More
Risk
Less
Risk
Current Portfolio
Recommended Portfolio
Current Recommended Gap
High Quality 69% 0% 69%
Short-Term 0% 0% 0%
Current Recommended Gap
Average Maturity 2.06 0.00 2.06
Average Duration 5.19 0.00 5.19
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source: advisor.myadvisorcenter.com
