CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures
A portfolio manager holds a bond with an empirical duration of 5.0 relative to the benchmark yield. Benchmark yield volatility is 90 bps annualized. Using the bond's empirical duration and assuming a one-standard-deviation annual yield move, the bond's approximate one-standard-deviation annual price volatility is closest to:
The approximate price volatility is 4.50%. It equals empirical duration of 5.0 times benchmark yield volatility of 0.90 percentage points (90 bps), since percentage price change is roughly duration multiplied by the yield change.
- A0.45%
- B4.50%Correct
- C18.0%
Explanation
Price volatility ≈ duration × yield volatility = 5.0 × 0.90% = 4.50%. Using 0.45% mistakenly divides by 10. Using 18.0% divides yield volatility into duration incorrectly (5.0/0.90 ≈ 5.6) or mis-scales; it is not supported by the data.
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