Market Value ($1000s) Market Value ($1000s) Market Value ($1000s) Bond Sector PO
ID: 2774183 • Letter: M
Question
Market Value
($1000s)
Market Value
($1000s)
Market Value
($1000s)
Bond Sector
PORTFOLIO A
PORTFOLIO B
PORTFOLIO C
Modified Duration
Cash
$0
$0
$0
0.00
2-YR
$400
$400
$0
1.90
5-YR
$300
$600
$600
4.65
10-YR
$300
$0
$400
8.50
Portfolio
$1000
$1000
$1000
Consider the three portfolios, A, B and C above as alternative ways to invest $1,000,000.
Identify the portfolios (A, B or C) that is best described by the corresponding statement:
Suppose that yields on bonds of all maturities rose by 100 basis points. Which of the three portfolios would give the manager the best investment performance should this happen? (A, B or C?)
Suppose instead that the 2-yr’s yield rises by 300 basis points, the 5-yr’s yield rises by 250 basis points, and the 10-yr’s yield rises by 100 basis points. Which of the three portfolios would give the manager the best investment performance should this happen? (A, B or C?)
Market Value
($1000s)
Market Value
($1000s)
Market Value
($1000s)
Bond Sector
PORTFOLIO A
PORTFOLIO B
PORTFOLIO C
Modified Duration
Cash
$0
$0
$0
0.00
2-YR
$400
$400
$0
1.90
5-YR
$300
$600
$600
4.65
10-YR
$300
$0
$400
8.50
Portfolio
$1000
$1000
$1000
Explanation / Answer
2 yr = percentage Price Change = 1.90 x 0.03 = 5.7%
3 yr = percentage Price Change = 4.65 x 0.025 = 11.625%
4yr = Percentage Price Change = 8.50 x 0.01 = 8.5%
Portfolio A = 40% x 5.7% + 30% x 11.625% + 30% x 8.5% = 2.28% + 3.49% +2.55% = 8.32%
Portfolio B = 40% x 5.7% + 60% x 11.625% + 00% x 8.5% = 6.93%
Portfolio C= 0% x 5.7% + 60% x 11.625% + 40% x 8.5% = 8.05%
portfolio A would give the manager the best investment performance
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