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?