Question

Why is indexing of bond portfolios difficult?

1) Lack of standardized benchmarks
2) Complexity of bond market
3) Difficulty in measuring risk and return
4) All of the above

Answer 1

Indexing of bond portfolios is difficult due to several factors including lack of standardized benchmarks, complexity of the bond market, and difficulty in measuring risk and return.

Step-by-step explanation:

Indexing of bond portfolios can be difficult for several reasons:

1. Lack of standardized benchmarks: Unlike stocks, which have widely recognized and standardized benchmark indices like the S&P 500, the bond market lacks such widely accepted benchmarks. This makes it challenging for investors to measure and track the performance of bond portfolios.
2. Complexity of bond market: The bond market is complex and consists of various types of bonds with different characteristics and risk profiles. This complexity adds to the challenge of creating and maintaining an index that accurately represents the performance of a bond portfolio.
3. Difficulty in measuring risk and return: Bonds have different durations, credit ratings, and yields, making it difficult to assess their risk and potential returns. This makes it challenging to develop accurate indexing methodologies that consider both risk and return.

Overall, the answer to the question is All of the above, as all the options listed contribute to the difficulty of indexing bond portfolios.