DEFINITION of 'Dedicated Portfolio'

A passive form of portfolio management that involves the matching of future cash inflows with future liabilities. The process of dedicating a portfolio may be used as an alternative to multiperiod immunization, which reduces the level of interest rate risk to which a portfolio is exposed.

BREAKING DOWN 'Dedicated Portfolio'

Because the portfolio is usually made up of investment-grade instruments, there is generally no need to rebalance it. Additionally, the payments are virtually guaranteed, as there is a low level of default risk associated with investment-grade instruments.

An example of a dedicated portfolio strategy could involve a pension fund that will begin making payment distributions to plan members in five years' time. To immunize this cash outflow, which is a liability to the pension fund, the fund could purchase five-year government bonds.

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