5 - B is said to be the correct answer. I don’t understand why increasing convexity (via call options) on the stable 30-year maturity is any desirable to enhance returns. If the yield curve is expected to be stable, shouldn’t more convexity be avoided to eliminate any return drag?
“She expects interest rate volatility to be high and the yield curve to experience an increase in the 2s/10s/30s butterfly spread, with the 30-year yield remaining unchanged.”
Because high-interest rate volatility is expected (at least in the short-term) and the question states “for the next 12 months”. High interest rate volatility means that interest rates can either move up or down. In the light of high interest rate vol., you are better off with convexity than without convexity.