Reading 23/EoC #20 (from CFA website):

Reading 23/EoC #20 (from CFA website):

expects a steepening yield curve, with short-term yields rising by 1.00% and long-term yields rising by more than 1.00%.

Which portfolio will have best performance:

Current Portfolio

Portfolio 1 (my answer)

Portfolio 2 (Correct answer)- why??

My answer was Portfolio 1, since 5 & 10 year clearly have higher duration (more bullet behaviour), and short end of curve (for Porfolio 1) has lower duration in short (1/3 yr) & long (30 yr) end of curve (Current Portfolio and Portfolio 2).

Bullet works best in steeping curve environment, and having lower duration in short (1/3 yr) & long (30 yr) end of curve lowers our losses to rising short & long term yield

Sorry guys, not sure how to copy paste the Exhibit 2 (From Question)

My understanding is that Pro Forma portfolio 2 has the least duration exposure in the 10Y and 30Y maturities, less than Portfolio 1 (existing portfolio), in addition to greater duration in the shorter maturities (1Y and 3Y) than Portfolio (existing portfolio) 1.

Therefore, it would benefit the most from the steepening of a yield curve. The 5 year maturity duration is the same between Portfolio 1 and Pro Forma portfolio 2 so it is not useful for comparison.


Thanks, but Portfolio 1 has the lowest duration (0.0374 for the long term) vs. Portfolio 2 (0.0394)…

I think, without actually doing the calculations based on the formula below (from curriculum), I just don’t see how one could have qualitatively/conceptually arrived at the right solution

Predicted change = Portfolio par amount × partial PVBP × (curve shift in bps)/100

The equation is the suggested approach to arriving at the solution…

thanks analystDC