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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

A portfolio manager holds a bond portfolio and calculates its duration as the market-value-weighted average of the modified durations of the individual bonds. This portfolio duration measure most likely assumes that:

The weighted-average portfolio duration most likely assumes that yields on all bonds change by the same amount, meaning a parallel yield curve shift. It does not require identical coupons or maturities, but it ignores twists and other non-parallel moves in the curve.

  1. Aall bonds have the same coupon rate
  2. Byields on all bonds change by the same amountCorrect
  3. Call bonds in the portfolio mature on the same date

Explanation

The weighted average of individual durations is a first-order approximation that implicitly assumes a parallel shift in the yield curve, so every bond's yield changes by the same amount. It does not require equal coupons or equal maturities. That is why it cannot capture non-parallel shifts.

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