Can someone explain the intuition behind the formula for calculating the duration of the portfolio: Duration of portfolio = (Duration of invested assets * invested funds - Duration of borrowings * amount of leverage) / Equity invested I don’t get why you subtract the (duration of the borrowings * amount leveraged)
The word duration of portfolio in that formula means Duration of your equity/investment Hope this helps.
^ What he said. Your formula is subtracting out the effects of debt/leverage to leave you with a pure measure of the duration of the portfolio=invested assets.
for me it makes sense to look at it as a hedge. basically the amounts borrowed from somebody else are the amounts invested by the lender, so it represents the lenders duration for its own portfolio. if a lender lends you money for a certain period with a certain interest that means that they are exposed to that duration. Don’t know if it makes sense for you, but for me it seems kinda intuitive
when you borrow something, you have negative duration. when you buy a bond, you’re lending your money to the bond issuer, you have positive duration (because bond has positive duration). So lender (investor) has positive duration. Borrower has negative duration.