bond; current spread (bps); historical mean spread (bps); std of spread (bps); A; 125; 98; 28 B; 100; 75; 15 C; 85; 100; 10 D; 75; 110; 15 which bond is the most attractive based on mean-reversion analysis.
I would say D, as it is 2.33 std deviations away from teh mean of 110.
B D and C are expensive compare to its historic spread. So that leave A or B, A is 27 above its historic mean spread with Std of 28; B is 25 above its hisboric mean spread with std of 15. On a spread/risk ratio, I pick B
I would Short D and go Long B 
ws Wrote: ------------------------------------------------------- > B you are right. u r picking one with lower t. can you tell why?
B you want spread to narrow to the mean ruling out D & C.
rand0m Wrote: ------------------------------------------------------- > ws Wrote: > -------------------------------------------------- > ----- > > B > > you are right. u r picking one with lower t. can > you tell why? Sorry, I edited my earlier post. here is my math A: spread above mean is 27, std is 28 so 27/28=0.96 B: spread above mean is 25, std is 15 so 25/15=1.66 B has a better spread/risk ratio.
Yes but to me D looks better b/c its 2.33 std deviation aways, so I’ll short the bond…Nothing said that we were going Long the bond 
bigwilly Wrote: ------------------------------------------------------- > Yes but to me D looks better b/c its 2.33 std > deviation aways, so I’ll short the bond…Nothing > said that we were going Long the bond Slickwilly!!!
good call big willy; i assumed long (so picked B). But if we can do both then shorting D with long B works. If we can only do one and can short, then D it is.
strikershank Wrote: ------------------------------------------------------- > B > > > you want spread to narrow to the mean ruling out D > & C. C & D are expensive, why don’t you short them
Ok, let me jump on long&short side…then if shorting is allowed, then D.
schweser’s answer is B … that’s why i like you folks’ opinions.
haha…I’ve created a monster. See I hate questions like this. If it was in the context of a long-only portfolio than ok, it’s clearly B. But if we are talking about an unconstrained portfolio then I would stick to my original answer. Hopefully, it will not be clear as mud on the tes.t
^ This is semi-ok. I hate it when they put muddy clear questions in GIPS or ethics. Then, that will be a SH*Tstorm.