SS10: reading 25, Q14, page 159: duration of leveraged portfolio
why when calculate levered portfolio, the denominator is the quity portfolio not the total portfolio (include borrowed amount) ? Thanks.
bcos the leveraged amount has a duration of or close to 0. (borrowed amount)
also you are comparing this against what might have been if you had invested in the entire amount.
your looking for duration of your portfolio, which is how much your equity will change in response to interest rate changes…
if you bring in leverage, or derivatives with notional principle, your not worried about how much the change will be as compared to the new portfolio value, your worried about how much it will affect you, your portfolio
CFAI does not always use the terms consistently. Here “duration of leveraged portfolio” is “duration of equity”. I will read careful in the exam.