Does Taking Corporate Credit Risk Add Value?
Earlier this week, we looked at whether adding credit risk in the form of lower investment-grade municipal bonds was an efficient approach to improving returns. The evidence is clear that this isn’t the case. In fact, taking more credit risk resulted in worse relative performance. Today, we’ll apply the same approach to determine whether adding corporate credit risk, again in the form of lower investment-grade bonds, is an efficient way to improve returns.
Each of our two examples will cover the 30-year period from 1984-2013. The first example compares returns from a typical 60 percent equity and 40 percent bond portfolio using investment-grade bonds to returns from a portfolio that limits its bond holdings to Treasuries.
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