Norton gives a green signal to the active management of funds. The fund has a total asset size of $200 million. Byron is expecting that the portfolio would provide a good return in next 30 days. So, he thinks of taking a leveraged position to get benefit from this expected rise. He has two options to take leverage. Either he can go for overnight repo or he can go for one month repo. He is confused about the impact on the duration of portfolio by those two options. He finally settles for monthly repurchase agreement. The annual rate for monthly repo is 4.8%. He gets $100 million to invest by repurchase agreement. The portfolio earns a total of 0.5% in next 30 days. He, then, sells the amount equal to the repurchase agreement liability and fulfills the liability at the end of the month. The duration of the portfolio before taking the leveraged position was 4.5 years. Byron invested the repurchase amount in the same duration of fixed income instruments
What was the portfolio’s equity duration just after taking the leveraged position? a) 4.50 b) 6.71 c) 6.75
As Galli pointed out before, you can’t really conclude if correlation (i.e., diversification) or sharpe (risk adjusted return enhancement) is more important in the context of your question. They both are. But if I were to pick the best answer, it would have to be C.
Only if absent of other information which is unliekly given how the majority of the CFAI context is about returns in relation to risk relative to investor objectives. Only arguing with you because there’s a lot of risk of misinterruptation with the assumption/answer you’re presenting.
From page 198, which is where you’ll find your “MORE LIKELY” comment from:
“…equation 3 indicates that, in a portfolio context, it would be incorrect to to avoid investing in relatively volatile nondomeestic markets without consideration given to their correlations and expected returns”
and
“If equation 3 holds, the investor can combine the new investment with his or her prior holdings to acehive a superior efficient frontier of risky assets”
Galli, to be completely candid, I know the wording of my question is somewhat vague. Nonetheless, you hit the nail on the head. The reason I started this thread 4 days ago was for that reason specifically - knowing information better. hopefully for everyone who has been cordially arguing this question (and those who’ve answered previous questions), this material will be tested - we will have a leg up on most others on test day. I just wanted to try to provide another avenue to “learn” this material. Me, you, and Ink will undeniably know this section inside and out because of our debate - let’s hope for a 10pt question on this in the AM
Junior why don’t you just go deep somewhere in how to compute utility or risk adjusted return. Something silly that is daily to forget. yardini or fed model… smothing rate of spending based on rolliing average or dunno what was the other methods. Taxes gifting such things .
i hear what you’re saying - my thought initially was to throw out some questions on important yet seemingly minutae-type stuff. personally, utility/risk adj returns, yardeni, fed model, etc - these things we should have locked and down cold inside and out. this is only day 4 of doing this, and i’m sure i’ll end up hitting some deeper stuff with those topics you mentioned…i don’t want to post 10 questions/day then it just gets to be information overload. i want to throw out 15-20 questions over the next 3 weeks or so, 1 question per day - questions that everyone will remember doing on this thread on test day - another way of remembering info.
Correct Answer is B: Portfolio’s equity duration = (DAA - DLL)/E = [4.5*300 - (1/12)*100]/200 = 6.71. Note that the duration of liability (repurchase agreement of term 1 month) is 1/12 years.
I googled “Konvexity sectional tests” and “Convexity sectional tests”.Google results were: are you f@#king kidding me?, with 2 emojis flipped fingers and a message saying " go to your MSN b#@ch". Then shut down the page on me.
