CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties
Portfolio A is a barbell of 2-year and 30-year bonds. Portfolio B is a bullet of 15-year bonds. Both have the same market value and the same duration. Compared with Portfolio B, Portfolio A most likely has:
Portfolio A, the barbell, most likely has higher convexity. With the same duration, a portfolio whose cash flows are more widely dispersed over time has greater convexity, and the 2-year and 30-year combination is more dispersed than a 15-year bullet.
- Alower convexity
- Bequal convexity
- Chigher convexityCorrect
Explanation
For equal duration, cash flows more dispersed in time produce higher convexity. The barbell has widely dispersed cash flows, so its convexity is higher than the bullet's. Equal convexity would require identical cash flow dispersion.
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