Is it meaningful to run Beta of a bond portfolio against S&P 500?
I came across this at work, but just don’t understand the point as beta of any bond portfolio obviously will be a lot lower than S&P 500. It make more sense to run Beta of bond portfolio against a bond index.
Neither one seems particularly useful to me.
Modified duration, effective duration, key rate duration, spread duration – these all make sense. Beta . . . not so much.
I can see it being relevant for Correlation trading. Bond (index) and Stocks (index) are generally negatively correlated and one can track the movements over time. If this correlation seems to be breaking then there is an opportunity.
Thanks guys. I have the same doubt. Isn’t Beta usually a risk measure for stocks? I don’t remember coming across running beta for bond portfolios in the CFA curriculum.
I presume that you mean that their _ returns _ generally have a negative correlation.
Out of curiosity, have you tested this yourself with indices, or are you taking someone’s word for it?
Yup returns… I’ve not tested it manually but keep going through articles in favour or against the normal negative corr ‘wisdom’. In india for example, the bond prices have kept up while stock have risen over last few years. So coming back to the question, there is definitely worth looking at at a bond index and SnP path. However, from risk perspective, bond’s duration instead of beta is used. Duration is sort of a beta isn’t it!
In my case, the PM wants to illustrate his portfolio is lower risk than both stock and bond markets, but I don’t get it…Aren’t fixed income portfolios usually more stable than stock market? Not sure why would us need to run the beta to prove the point given stock market has low correlation with fixed income portfolios? It seems to me meaningless as stock market is almost irrelevant to fixed income, unless I’m missing something here.
Many years ago I got a phone call from one of my CFA candidates, Level II I think. I had developed software to determine the correlation of returns between pairs of assets, and he wanted me to run an analysis on a number of mutual funds. We started with a bunch of equity funds and, as you can imagine, the correlations of returns were quite high: +0.90 or above as I recall. Then he asked me to throw in a bond fund. Surprisingly, the average correlation of returns of the bond fund with the equity funds was . . . wait for it . . . +0.40. I was quite surprised, as was he.
…there is a 2x negative ‘yellens mouth’ etf (ticker USYM) in his portfolio.when combined with a 60/40 gives a 5.0 sharpe ratio… or so i heard.
His portfolio is all fixed income so what 60/40 is about?