CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures
A manager holds a portfolio with key rate durations of 1.0 at 2 years, 2.0 at 5 years and 5.0 at 30 years. The yield curve steepens, with short-term yields unchanged and long-term yields rising. The portfolio's value is most likely to:
The portfolio value will most likely decline, mainly because of the 5.0 key rate duration at 30 years. Steepening raises long-term yields, and the portfolio is most sensitive there, while the unchanged short-term yields add no offsetting gain.
- Arise because the 2-year key rate is unchanged
- Bdecline mainly because of its exposure to the 30-year key rateCorrect
- Cbe unchanged because effective duration is low
Explanation
The largest key rate duration is at 30 years, so rising long-term yields hurt most. Unchanged short rates produce no gain, and effective duration (8.0) is not low; it would apply only to a parallel shift.
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