The manager of a bond fund is assessing several choices in attempting to immunize a portfolio. To meet a predetermined liability, the manager needs a 6% return. Which of the choices below would be the best in pursuit of that goal? An immunized strategy with a target return equal to: A) 6.4% with a 95% confidence interval at +/- 40 basis points. B) 6.0% with a 95% confidence interval at +/- 10 basis points. C) 6.0% with a 99% confidence interval at +/- 20 basis points. Your answer: C was incorrect. The correct answer was A) 6.4% with a 95% confidence interval at +/- 40 basis points. Of the three portfolios, the portfolio with a 6.4% target return and a +/-40 basis point confidence interval has the best chance of achieving the specified return. The chance of not achieving that return is (1 - 95%) / 2 = 2.5% or one out of 40. The portfolios with the 6% target return have only a 50% chance of achieving the specified return.
Well, according to the question, the goal is to get a return of at least 6%. Which of these choices has the lowest probability of falling short of 6%?
answer got to be A…we only 2.5% chance of falling short of the 6% B n C are normal distribution with mean returns of 6.0% hence a 50% chance of failing short of 6%