2011 AM Question 9C

Manager A says he adds value by actively managing duration. I assumed the answer was that we don’t have enough information – all we know is that the interest rate effect was negative; we don’t know which of the 3 components (duration / convexity management or yield curve shape) are negative. Duration effect could be +1% and convexity could be -2% and vice versa.

CFAI says that because he has negative interest rate management effect, he fails at duration management. Am I missing something?

Curriculum doesn’t really mention “managing” convexity focus is on duration. Yield shape is key rate duration

I actually thought Manager A explanation was clearer than Manager B. For Manager B I put Yes originally, but then changed it because I thought Other Management Effects was too vague. If I had Yes/No only to choose, I would have definitely said Yes.

I might choose “cannot determine…”, but the over-thinking on this Q can cost points.

The second part is also bad because if other mgmt effects includes the transaction cost component, then that could of been the result of outperformance. A stretch maybe, but unless they are gonna give numbers both questions are bad.

I think the part of Manager A is awful. What an unfair question. Somewhere in fixed income we learn the 90%+ of yield curve changes are due to twists and shifts rather than parallel changes (i.e. duration), so he could have very easily had a much more negative effect from the other factors than a positive effect from duration. So you have no idea what the contribution from duration was unless you see a breakout.

also the problem with part B is that it says he gained from undervalued securities. how do you know he didnt short overvalued securities? that is another reason why B can be “cannot determine.”

I don’t think there’s any over-thinking! They asked about managing duration but only gave us information on interest rate effect. Those are not synonyms!

CFAI is always right