"Duration of EQUITY", V4 p. 109

CFA Level III
#1

It seems that there is some naming discrepancy below. Can you help? * PORTFOLIO RATE OF RETURN * Duration of EQUITY (duration of portfolio) ------------------------------------------------------------------------------------------------ Rp = (PORTFOLIO RATE OF RETURN) = (Profit on borrowed funds + Profit on equity)/(Amount of equity) =[B\*(rF-k)+E\*rF]/E =rF +(B/E)*(rF-k) (V4 p. 108). ------------------------------------------------------------------------------------------------ With DA denoting the duration of the assets (the bond portfolio) and DL the duration of the liabilities (borrowings), the duration of EQUITY, DE, is given by DE =(DA*A-DL*L)/E (V4 p. 109). ------------------------------------------------------------------------------------------------

#2

thanks.

#3

not sure what the question is?

#4

I can understand that the portfolio rate of return is Rp = rF +(B/E)*(rF-k). But I couldn’t understand why the following DE is called “the duration of EQUITY”. DE =(DA*A-DL*L)/E According to the convention for Rp calculation, shall the above duration be called “the duration of the portfolio”?

#5

Think of equity in a balance sheet framework, Assets = Liabilities + Equity. Duration of equity being duration of the assets in the portfolio that you own, and are not borrowing in order to own. You’re using “equity” to purchase them.

#6

Thanks. There is an EOC question which has been posted on another thread. http://www.analystforum.com/phorums/read.php?13,1249946 I’ll go there to continue the discussion.