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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

An analyst computes portfolio duration as the weighted average of the durations of the individual bonds. The most significant limitation of using this measure to estimate portfolio value changes is that it:

The key limitation is that the weighted average duration assumes a parallel shift in yields across all bonds. When the yield curve twists or yields of different bonds change by different amounts, the estimate of portfolio value change becomes unreliable. The calculation does use market-value weights.

  1. Agives accurate results only for portfolios with one bond
  2. Bassumes a parallel shift in yields across all bondsCorrect
  3. Cignores the weights of the individual bonds

Explanation

The weighted average duration implicitly assumes each bond's yield changes by the same amount, a parallel shift. Non-parallel shifts in the yield curve, such as a steepening, make the estimate unreliable. The weights are included in the calculation, so the third option is wrong.

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