T he duration statistic has proved to be a valuable risk indicator for fixed-income portfolios.
Duration gives an indication of how sensitive a portfolio is to changes in interest rates.
Duration also provides a benchmark for comparing the relative sensitivity of fixed-income portfolios. A portfolio with a duration of 10 years is twice as volatile as a portfolio with a duration of five years. These models transform a stock portfolio into a stream of future payments. It then becomes a simple matter to calculate the duration statistic for the payment stream. Analysts and investors have difficulty developing creditable estimates for next quarter's dividends, much less for those in the far future.