EOC Reading 25 Fixed Income Part 2

So Question 23 asks if there is a mismatch in duration between the benchmark and portfolio, 5.6 vs 10.2 respectively what should the manager be most conerned about?

A. flattening of the yield curve

B. Steepening of the yield curve

C. Large parallel shift up in the yield curve

Why is the answer A? If the portfolio has more duration than the benchmark shouldn’t the manager be concerned about having a further risk in duration?

In other words, if rates go up duration would increase and wouldn’t that be more of a concern? I am having a hard time here.

The answer says: A is correct. Given the mismatch in the liability and the benchmark they are running against, a flattening of the yield curve would cause the liability to increase faster than the asset.



thanks i should have searched, my bad.