What is Horizon Analysis?

Horizon analysis compares the projected discounted returns of a security or investment portfolio’s total returns over several time frames, often referred to as the investment horizon.

Key Takeaways

  • Horizon analysis compares the projected discounted returns of a security or investment portfolio’s total returns over several time frames, often referred to as the investment horizon.
  • Typically, horizon analysis is used to gauge the expected performance of portfolios comprised of fixed income securities (bonds).
  • Horizon analysis enables the portfolio manager to evaluate which bonds would perform the best over the planned investment horizon.
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Understanding Risk And Time Horizon

Understanding Horizon Analysis

Horizon analysis uses scenario analysis to estimate a more realistic expectation of an investment, or portfolio's, performance. Typically, this type of analysis is used to gauge the expected performance of portfolios comprised of fixed income securities (bonds).

The horizon analysis framework allows portfolio managers to project the performance of bonds on the basis of the planned investment horizon and expectations concerning levels of risk, interest rates, reinvestment rates and future market yields.

By breaking down expected returns into scenarios, it is possible to evaluate which bonds would perform the best over the planned investment horizon – something that would not be possible using the yield to maturity (YTM). This scenario analysis enables the portfolio manager to see how sensitive a bond’s performance will be to each scenario, and whether it would be likely to meet their investor's goals over their expected investment horizon.