Dedicated Portfolio Theory

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.

The most recent book on the topic by Huxley and Burns, based on a research project at the University of San Francisco was published in the late 1990s and a book titled Asset Dedication was published in 2005 described how the advances in desktop computers reduced the cost of constructing dedicated portfolios to levels where individual investors could use the concept for personal investing, such as the example below shows for a retirement portfolio. Read More…

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