Which investment strategy is least effective in managing interest rate risk?

Investing heavily in long-term securities is the least effective strategy for managing interest rate risk because long-term bonds are more sensitive to changes in interest rates compared to short-term bonds. When interest rates rise, the prices of long-term bonds typically fall more significantly, leading to greater potential losses in a portfolio heavily weighted towards these securities. This heightened price volatility makes it challenging to manage the overall risk associated with interest rate fluctuations.

In contrast, investing in bonds with shorter maturities reduces exposure to interest rate risk, as these securities typically mature sooner and therefore have less time for interest rate changes to affect their prices. A laddered portfolio strategy helps by spreading investments across various maturities, thereby balancing risk as bonds mature at different times, providing a buffer against interest rate movements. Diversifying across different types of securities similarly mitigates risk by not being overly exposed to any single asset class that might be affected by interest rate changes. Thus, these strategies offer more effective means of managing interest rate risk compared to a heavy investment in long-term securities.