Final answer:
Yes, sensitivity analysis applies to short-term investment portfolios with fixed-income securities to understand the impact of market conditions. High-risk levels have often led to significant losses in portfolios during economic downturns.
Step-by-step explanation:
Yes, sensitivity analysis can be used for a short-term investment portfolio consisting entirely of short-duration, high-credit-quality fixed-income securities. Sensitivity analysis helps investors understand how changes in market conditions, such as interest rates, can affect their portfolio values.
Although these types of investments typically have low-risk levels, they can still be influenced by factors such as inflation rates, fluctuations in interest rates, and credit risk changes.
High-risk levels in investment portfolios have historically been detrimental during periods of economic downturn, as seen in the 2008 financial crisis where high-risk mortgage-backed securities significantly lost value. In contrast, investments in government savings bonds, money market mutual funds, and small CDs (Certificates of Deposit) usually offer more stability.
Nonetheless, they can still be subject to interest rate risk and inflation risk, making the analysis crucial for investment decision-making.
Inflation tends to hurt lenders more than borrowers because it decreases the purchasing power of the money when it's paid back. It also harms those with "fixed" incomes, such as retirees on Social Security benefits, as their income does not increase proportionally with the rising cost of living due to inflation.