Dedicated portfolio theory

Dedicated portfolio theory, in finance, deals with the characteristics and features of a portfolio built to generate a predictable stream of future cash inflows. This is achieved by purchasing bonds and/or other fixed income securities (such as certificates of deposit) that can and usually are held to maturity to generate this predictable stream from the coupon interest and/or the repayment of the face value of each bond when it matures. The goal is for the stream of cash inflows to exactly match the timing (and dollars) of a predictable stream of cash outflows due to future liabilities. For this reason it is sometimes called cash matching, or liability-driven investing. Determining the least expensive collection of bonds in the right quantities with the right maturities to match the cash flows is an analytical challenge that requires some degree of mathematical sophistication. College level textbooks typically cover the idea of “dedicated portfolios” or “dedicated bond portfolios” in their chapters devoted to the uses of fixed income securities.[1][2][3][4][5][6][7]

  1. ^ Bodie, Zvi; Kane, Alex; and Marcus, Alan. Investments, 8th ed. McGraw-Hill Irwin, 2009, p. 538.
  2. ^ Bodie, Zvi; Kane, Alex; Marcus, Alan. Essentials of Investments, 8th ed. McGraw-Hill Irwin, 2010, p. 344.
  3. ^ Fabozzi, Frank. Bond Markets, Analysis, and Strategies, 3rd ed. Prentice Hall, 1996, p. 447.
  4. ^ Fabozzi, Frank. The Handbook of Fixed Income Securities. McGraw-Hill, 2005, p. 1103.
  5. ^ Jordan, Bradford and Miller, Thomas. Fundamentals of Investments. McGraw-Hill Irwin, 2009, p. 334.
  6. ^ Logue, Dennis. Managing Corporate Pension Plans. Harper Business, 1991, p. 219.
  7. ^ Sharpe, William; Alexander, Gordon; and Baily, Jeffery. Investments, 5th ed. Prentice Hall, 1995, p. 478.