CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

Which of the following statement is (are) true with respect to yield curve risk?

I. The effective duration of a portfolio is simply the sum of the duration of each of the individual bonds in the portfolio.
II. The effective duration of a portfolio indicates by what percent the portfolio value will change as a result of a change in the yield curve.
III. Key rate duration measures how much the portfolio value will change given a yield change for only one specific maturity.
IV. For a given portfolio, the rate duration will be the same for every maturity along the yield curve.
A. I, II, III and IV
B. III only
C. I and III
Explanation: I is not entirely true because the effective duration of a portfolio is the weighted average of the duration of each of the individual bonds, with the weights being equal to the bond's market value as a proportion of total portfolio value.

II is not entirely true either because effective duration of a portfolio indicates by what percent the portfolio value will change as a result of a "parallel" shift in the entire yield curve. A parallel shift would mean that interest rates at all different terms would have to change by the same amount, a rare occurrence indeed.

IV is incorrect because for a given portfolio, the rate duration will be different for every maturity along the yield curve.

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