it is possible to increase the yield of the portfolio without a proportionate increase in risk by: A) underweighting 1-5 year Treasuries and overweighting 1-5 year corporates.” B) overweighting 1-5 year Treasuries and underweighting 1-5 year corporates.” C) underweighting long-term Treasuries and overweighting long-term corporates.”


A is correct. Didn’t seem to recall CFAI coverage on this.

what is the reasoning behind this?

B would decrease yield, so that’s out. Not sure about the argument between A and C.

A, by shifting money from Treasuries to Corporates you pick up extra yield (corporates normally have a positive yield spread over Treasuries), and the extra yield will out weight the extra risk (no facts to back the 2nd part up, just what I remember reading). Not C because the DURATION of LONG TERM corporates will add significant risk, making the extra yield pick up not as great on a risk adjusted basis. -Mitch

very vague question, but in a nutshell - corporates yield more than treasuries because they are riskier. So you overweight the higher yielding bonds (corporate) while underweighting the less-risky (treasuries). Crap question.

The answer A is right because risk exposure to corporate short term bond is much less than long term bond whereas risk exposure for treasury is much less from short term to long term. Therefore you can add yield by shorting short term treasury and adding short term corporate bond without proportionate increase in the risk. B is out because it will decrease the yield. I hope this helps.

Answer is A. I have in my notes ( made from CFAI) The manager will overweight short-term corporates because the credit risk is depressed in short term and use govt. bonds for long term.