Is it possible to create a corporate bond portfolio such that its yield is 100bps higher that its benchmark, while still outperforming the benchmark (BBG Corporate bond Index)? I guess my question is if I am looking at constructing a higher yielding portfolio and still trying to beat my benchmark, what are some factors, constraints etc I should consider and how would I adjust them. Assuming I am starting with a 100M AUM and implementing from scratch without the use of ETFs.
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The best thing you should do is to download returns of a corporate bond portfolio, and then create a diversified bond portfolio whose beta against the benchmark is such that it yields an expected return that is 100bps higher.
One way of doing this is just to run a Mean-Variance problem, to choose weights of corporate bonds such that the average return you achieve is 100bps higher than the average return of the benchmark. This return could come from either alpha or beta against the benchmark, but if it is truly a well diversified bond portfolio, most of it should be beta risk.
