CFAI Practice Problem. Reading 20. Question 12

Question: Hirji then considers the scenario where the yield curve will lose curvature for the Malaysian institutional client. She notes that a 7-year Canadian government bond is also available in the market. Hirji proposes a duration-neutral portfolio comprised of 47% in 5-year bonds and 53% in 7-year bonds.

Relative to the Canadian government bond index, the portfolio that Hirji proposes for the Malaysian client will most likely :

  1. underperform.
  2. remain stable.
  3. outperform.

Answer: C is correct. Hirji proposes an extreme bullet portfolio focusing on the middle of the yield curve.

I understand a bullet portfolio will outperform when the yield curve it losing curvature but I am confused how a two bond portfolio where you are long both bonds can be duration neutral.

Ok, I think this is just a poorly worded question and the portfolio is actually duration neutral to the benchmark? Does anyone agree?

I came here with the same question. Duration neutral would seem to imply the long and short offset when the yield curve changes…

any insight would be helpful…

From my reading of this question, I think they are implying that the existing bond exactly matches the benchmarks duration. When I answered it I assumed I needed to just weight the two other bonds to get an aggregate duration matching the existing.