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What will lead to a long position of extreme barbell portfolios?

Hello all,

In the Curriculum Book 4, SS10-11, Fixed income portfolio management, Reading 24 Yield Curve Strategies, Question #23,

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Does anyone want to choose C? I think the parallel downward shift of the yield curve and the flattened yield curve both can lead to an increasing convexity strategy. Can anyone give me a hint?

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I dont think the answer is to increase convexity. That is only desired in a parallel shift. The main advantage to the extreme barbell is the increase in the long bonds for a flattening curve.

To 125mph,

125mph wrote:

I dont think the answer is to increase convexity. That is only desired in a parallel shift. The main advantage to the extreme barbell is the increase in the long bonds for a flattening curve.

You ‘re right. The best practice of facing a parallel downward shift, is to maintain the current allocation with no adjustment.

C) will not be the best answer (in normal circumstances), because:

- Yes, you would increase convexity by using the extreme barbell strategy, but will sacrifice yield due to the convexity benefit you are receiving. You will outperform the benchmark in INSTANT changes, but by a very little margin (see exhibit 65 of the book). The hint here is the 12 month horizon, you will receive more yield in a laddered or bullet portfolio in the 12 months than the benefit of convexity in an extreme barbell portfolio, so the extreme barbell is not the best strategy for option C).

Hope it helps.

If you believe that the long and short ends of the yield curve will fall and the middle of the curve will rise − an inverse butterfly, if you will − a long barbell will outperform bullet portfolios and laddered portfolios with the same duration.

Simplify the complicated side; don't complify the simplicated side.

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Omarkf wrote:

C) will not be the best answer (in normal circumstances), because:

- Yes, you would increase convexity by using the extreme barbell strategy, but will sacrifice yield due to the convexity benefit you are receiving. You will outperform the benchmark in INSTANT changes, but by a very little margin (see exhibit 65 of the book). The hint here is the 12 month horizon, you will receive more yield in a laddered or bullet portfolio in the 12 months than the benefit of convexity in an extreme barbell portfolio, so the extreme barbell is not the best strategy for option C).

Hope it helps.

Just like what you said: “The hint here is the 12 month horizon, you will receive more yield in a laddered or bullet portfolio in the 12 months…”, which portfolio, bullet or ladder, will perform better? Thanks.