What is the advantage of the classical immunization method?

The advantage of the classical immunization method is primarily its ability to protect against interest rate movements. This method entails structuring a bond portfolio in such a way that the portfolio's duration matches the investment horizon. When these two durations are aligned, the portfolio is designed to be insensitive to changes in interest rates. As interest rates fluctuate, the intermediate cash flows from the bonds adjust accordingly, and the value of the portfolio remains stable when viewed at the timeline of the liabilities or goals it is meant to fund.

This protection is crucial for investors, especially those with specific liabilities or future cash flow obligations, as it helps maintain the present value of future cash flows despite the volatility of interest rates. By minimizing the effects of interest rate risk in this manner, investors enhance certainty regarding their financial objectives.

Other options may suggest benefits like guaranteed absolute returns or increased exposure to equities, but those do not accurately reflect the primary purpose of classical immunization, which is focused on managing interest rate risk rather than the return characteristics of the investment or shifting asset classes. Additionally, while managing a bond portfolio might offer reduced administrative costs in some scenarios, this is not a central feature of the classical immunization strategy itself.