The Bond Market Line and the Performance Attributes

Abstract

The present study analyzes some important aspects of the Bond Market Line proposed by Wagner and Tito (1977) [1]. This line shows Macaulay’s duration of a portfolio of bonds and the corresponding return compared to that of a chosen reference bond market index. Once the risk measure,  coefficient, or standard deviation,  is replaced by the portfolio duration, the Bond Market Line looks like a security market line with zero Beta. However, this line starts from the risk-free rate after one year. Thus, it is a discontinuous curve. The Bond Market Line is more or less is an upward sloping straight line showing the different combinations of durations and returns offered by the Bond Market Index. That is, this line shows a positive relationship between the duration of a bond portfolio and the corresponding return of the reference Bond market Index.