Vol4, pg155, q23 - Duration mismatch

Duration of Portfolio = 6.2

Duration of Liabilities = 10.2

Duration of Benchmark = 5.6

How is the plan manager most concerned about FLATENNING of the yield curve?

Going from upward sloping to flat would decrease assets and increas liabilities.

No beuno.

Flatening means long-term rate down more than short-term…

(long term) liability increase more than (short-term) portfolio (asset)

However, portfolio outperform benchmark…

Though it is not correct when the curve is downward?


further question about this topic -

when to calcualte number of contracts needed to adjust ducation, what should the target ducation be?

Benchmark duration or liability duration? The textbook uses benchmark duration. But should the liability duration be used to have the porfolio match with liability?

In this instance, it’s because the question asks specifically asks for the number of contracts to match the benchmark duration.

“Based on the data Ferragamo collected on the bund and Exhibit 1, Choo can adjust the EPF portfolio duration to match the benchmark duration by selling:”

shame, yes that was the question. Need to be careful what is asked.

No worries, your question shows you’re grasping the concepts. Just be sure to train yourself to approach each question with extreme scrutiny - RTFQ. Then when responding, be sure you’re answering what is being asked and not responding with what you thought should have been asked. One of the most frequent self-made traps candidates fall victim to year in and year out.