IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Duration, convexity and immunisation
A fund has a Macaulay duration of 8.40 years at an effective annual yield of 5%. What is its volatility (modified duration), to two decimal places?
The volatility is 8.00. Modified duration equals Macaulay duration divided by one plus the effective annual yield, so 8.40 divided by 1.05 gives 8.00. Multiplying instead of dividing, or leaving duration unadjusted, gives incorrect values.
- A8.00Correct
- B8.82
- C8.40
- D7.98
- 8.58
Explanation
Volatility = Macaulay duration / (1+i) = 8.40/1.05 = 8.00. Multiplying by 1.05 gives 8.82, which is the wrong direction. Using 8.40 unchanged ignores the adjustment.
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