FI Quiz

What bond index is appropriate for investors who are risk averse and senstive to flucuations in portfolio value? A) Long-Term Corporate Index B) Short-Term Corporate Bond Index C) High Yield Bond Index



B But it sounds simple, so I’m probably missing something.

a short duration bond should be less sesnsitive to int rate changes so B

Wait…so the question is asking for a BENCHMARK index…not an index fund right? If your actively managed portfolio is sensitive to interest rate shocks, it seems like a good bet you have you have a high duration portfolio…which would mean you should benchmark to a long-term bond index, right? So I’m going with A.

risk averse and do not want fluctuations – pretty sure answer is A) Long term corp index.

I would say B. Short term bonds would act similar to that of floating rate bonds, which have high cash flow risk and low market value risk. The long term portfolio will have higher swings in value (but more stable cash flows), and a risk averse investor would not want a high yield bond portfolio (especially because changes in the spreads would make the portfolio value fluctuate as well).

I am saying B too. Obviously duration matters most in bonds and short term bonds are the way to go if you are risk-averse and sensitive to changes in interest rates.

answer is B - this is an example in the text

thanks, good idea.

So I’m still a little confused by this question…it would make sense if it was asking about an index fund, but it seems to imply it’s asking about a benchmark. Mcap, what’s the book’s explanation (summarized)?

page 12, v4, example 1

Ok, so I see what they’re asking…boiled down, it’s “you’re an investment management firm that offers index funds…which of the following would be the best index to create an index fund for a risk-averse, short duration-loving investor?”

B, Sensitive to Cash flow changes. A