Hi all
so here is the question as per the book:
Exhibit 1. Cefrino Sovereign Bond Fund Current Fund Holdings of On-the-Run Bonds
Maturity** Coupon/YTM Market Value Modified Duration** 1-year 0.78% $10,000,000 0.99 3-year 1.40% $10,000,000 2.92 5-year 1.80% $10,000,000 4.74 10-year 2.34% $10,000,000 8.82 30-year 2.95% $10,000,000 19.69 Portfolio 1.85% $50,000,000 7.43
Based on Exhibit 1 and Abram’s expectation ( Abram expects a stable yield curve) for the yield curve over the next 12 months, the strategy most likely to improve the Fund’s return relative to the benchmark is to:
- buy and hold.
- increase convexity.
- ride the yield curve.
For me, both A and C are valid answer. the decision will be made on the transaction costs, the holding period etc…
For the book, the answer is C.
Can someone tell me why C is better than A? a ride the Yield Curve is always better than a buy and hold for stable curves?
thanks