Durationweighted

Duration-weighted is a financial and investment term used primarily in the context of portfolio management and risk measurement. It refers to a method of calculating the sensitivity of a portfolio's value to changes in interest rates by weighting each bond's duration by its respective market value. Duration, in this context, measures the weighted average time until a bond's cash flows are received, reflecting both the timing and magnitude of those cash flows. By incorporating market value into the calculation, duration-weighted adjustments provide a more accurate representation of a portfolio's interest rate risk compared to simple duration alone.

This approach is particularly useful for portfolios containing bonds with varying maturities, coupons, and credit ratings, as it accounts for the differing market values of each bond. The duration-weighted duration (often referred to as "Dollar Duration" or "Modified Duration") is calculated by summing the product of each bond's duration and its market value, then dividing by the total market value of the portfolio. This metric helps investors assess how much a portfolio's value might change in response to a 1% shift in interest rates, providing a more nuanced understanding of interest rate risk.

Duration-weighted analysis is commonly employed by fixed-income portfolio managers, pension funds, and other institutional investors to evaluate and hedge against interest rate fluctuations. It is also used in conjunction with other risk management tools, such as convexity adjustments, to refine risk assessments further. While duration-weighted methods offer valuable insights, they assume that interest rate changes are small and parallel, which may not always hold in dynamic market conditions. Nonetheless, it remains a foundational concept in modern portfolio theory and fixed-income analysis.