equity - bond - cash

When i have a portfolio invested in either equity or bond and i have to shift from 1 to another or convert to cash

1- when do I use the duration of cash (do i only use it with bonds or with equity too)

2- when do i use expiration as (duration new - duration old) since they used it once in the mock exam.


  1. use duration of cash when you are actually only converting to cash (not from equity-cash-bond and vice versa). duration is only for bonds, for equity beta of cash is 0

  2. when you are alterating only the duration of same portfolio of bonds

great thanks :slight_smile: !

Doesn’t matter at all for the equity side since there shouldn’t be much correlation between duration and equity movements. It only matters on the bond side. If you want cash and cash has a duration, the amount of cash you get increases your duration. You traded in for cash and it’s duration, even if you trade it again for equity it’s still there.

You use it mostly if you alter. I think it also matters if your converting. Say your use the cash to long bonds. An increase in yield will affect both the short and the long. If you don’t accout for that your over stating your duration.

1 more thing dont forget to multiply the answer by yield beta if its given cause usually the assumption is yb = 1 , but if its more multiply by yield beta.

So i would say duration of cash / expiration would only be used in the case of bonds (whether buy or sell) not equity.

Yup no relationship with equity at all unless cash has a beta or equity has duration in the question (HIGHLY HIGHLY UNLIKELY). It kinda make sense that a change in yield should affect cash instructments sense you don’t just sit on the cash until maturity. After this long explaination, I am pretty sure it won’t be in the exam.

i have a feeling that it will be on the pm session :slight_smile: … bond - eq, eq - bond , increasing beta, decreasing duration, conv position to cash or cash to equity … and if we’re lucky we’ll have this on the am session but i highly doubt it. Am will focus mainly on volume 2 … embrace yourself for a concentration position case

Off topic, but Bilal do you know if there is any good concentrated portfolio questions from previous mock, schweser or eoc?

well there were few questions from previous mocks but the material changed and i would definitely concentrate on the new material not the old one cause its more in depth. I dont really use schweser as I only focus on cfai eoc questions, blue boxes, reading material, mocks and morning sessions. I only used schweser for level 1 and 2_. I believe we might get a case on either monetization or sale & leaseback / mort ref as they appear to be good material for morning session._ I think we’ll have the currency new added material on the pm (like 1 whole vignette on em).

EM?, currency management in emergin markets, seriously? i thought there was hardly any stuff on it in the text

Blue boxes questions are great on concentrated positions. Highly recommended.

haha em is supposed to be PM … dont freak out :stuck_out_tongue: … typo mistake.

Haha! In fact I had skipped that, but just now read whatever stuff was there on it! :wink:

I wrote an article on this that may help: http://financialexamhelp123.com/the-synthetics-cash-equity-and-fixed-income/.