Can Bonds Still Diversify Multi-Asset Portfolios? Income versus Duration in Distinct Correlation Regimes
Analyzing Income, Duration, and Correlation in Multi-Asset Investing
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About the Masterclass
We analyze the diversification benefits of fixed-income instruments under time-varying correlations. We estimate monthly, non-overlapping correlations from daily 10-year Treasury bond returns over the period January 1962 to May 2025. With these data, we use a hidden Markov model to identify three distinct correlation regimes, negative, zero, and positive. These regimes are highly persistent and differ in their diversification value depending on the importance of income versus duration as drivers of bond returns. Dynamically altering the mix of multi-asset portfolio allocations based on the most likely correlation regime materially improves returns while controlling risk.
What will you learn?
Discover data-driven portfolio strategies
Learn hidden Markov model applications
Understand bond diversification dynamics
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University of California, Berkeley | Haas School of Business (MFE)
The Fong Master of Financial Engineering Program at the University of California, Berkeley’s Haas School of Business provides a rigorous curriculum focused on teaching students how to combine modern portfolio theory with computational and machine learning methods. Our students benefit from the quality of their classmates, the breadth of electives offered to them, and the network of impressive alumni and industry contacts inherent to a top-ranked business school and world-class university. In one year, our students are ready to take leading roles as well as apply their education and skills at the cutting edge of finance, fintech, and data science.
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