CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties
A portfolio consists of two bonds. Bond 1 is 40% of portfolio market value with a convexity of 20, and Bond 2 is 60% of market value with a convexity of 80. The portfolio convexity is closest to:
Portfolio convexity is about 56. It is the market-value-weighted average of the individual convexities: 40% times 20 gives 8, and 60% times 80 gives 48. A simple average of 50 ignores the weights, and swapping the weights gives 44.
- A44
- B50
- C56Correct
Explanation
Portfolio convexity is the market-value-weighted average of the bond convexities: 0.40 x 20 + 0.60 x 80 = 8 + 48 = 56. A simple average gives 50, and reversing the weights gives 44.
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