Use This Simple Measure to Find Your Yield Exposure

How to calculate and interpret a bond’s duration

Photo by Frank Busch on Unsplash

One of the most common and important questions investors ask when investing is: what am I getting exposure to? This question applies across all asset classes and may not be as straightforward as it first seems. There are a range of factors that affect the value of a security and, in combination, the value of your portfolio. These can be macroeconomic factors, which capture broad risks associated with the business cycle and its impact on financial markets, and style factors, which explain risk and return within an individual asset class.

As investors, we need to expose ourselves to risk in order to generate a return. Unfortunately, there is no escaping this fact. Factors that help us generate a return are therefore factors that expose us to risk, hence why they tend to be called risk factors. We want to know how much risk we are taking on to generate a given return. We also want to make sure that we are properly compensated by the market for taking on risk, and that the overall sensitivity of our portfolio to our target risk factors is manageable and in line with our risk tolerance and broader objectives.

This post will briefly cover the most important risk factor that bond investors must manage, namely yield exposure. Yield…