Portfolio Management Flashcards

A bond portfolio has a modified duration of 5. If yields rise by 1 percentage point, the approximate price change is:

Answer: -5%

Price change ≈ -modified duration × change in yield = -5 × 1% = -5%.

To immunize a single future liability against parallel interest rate shifts, a manager should primarily:

Answer: Set the portfolio's duration equal to the liability's horizon, with present value at least equal to the liability's

Matching duration to the horizon means reinvestment-rate effects and price effects offset each other.

Why is positive convexity valuable to a bondholder?

Answer: Prices rise more when yields fall than they drop when yields rise by the same amount

Positive convexity means the price-yield curve bows outward, giving asymmetric gains for equal yield moves.

A portfolio has a one-day 95% Value at Risk (VaR) of $1 million. This means:

Answer: There is a 5% chance the one-day loss will exceed $1 million

VaR gives a loss threshold that is exceeded only with the stated tail probability, here 5% of days.

For a two-asset portfolio, a zero-variance combination is possible only when the correlation between the assets is:

Answer: -1.0

With perfect negative correlation, weights can be chosen so the assets' fluctuations fully offset.

Adding more securities to a portfolio mainly reduces which type of risk?

Answer: Unsystematic (firm-specific) risk

Diversification removes idiosyncratic risk, but market-wide systematic risk remains.

Compared with a bullet bond portfolio of the same duration, a barbell portfolio generally has:

Answer: Higher convexity

A barbell spreads cash flows to the short and long ends, increasing dispersion and therefore convexity.