The answer is C - corporate since it contributes the spread duration.
however, the question is asking “which sector that poses the most tracking error relative to the benchmark”, personally I think it is A - Treasury, since the dollar duration of Treasury with benchmark is the bigger than corporate.
what’s your view?
Treasury have zero spread duration
yeah, I know. But duration does not mean “spread duration” only. Given the duration of treasury is 5, it also contribute the tracking error if the yield curve move downward or upward parellel. right?
contribution from spread duration is what the question is about
since spread duration of treasury is 0 -> contribution is 0.
thanks and I know “contribution from spread duration is what the question is about”, but if you do not review the answer, how can you know it? Can we get some tips from the question itself?
I think you are right on with this.
The question is about tracking error vs a benchmark, not spread duration. Page 19 of CFAI book 4 lists the 7 primary drivers of tracking error in a bond portfolio. Having a higher duration Treasury portfolio vs the bm certainly qualifies as a driver of tracking error.
I think answer could be A or C.
Thanks ftwcfa, I totally agree with you. That’s why I’m confused.
Even then its C
calculate the wt avg duration of the portfolio & benchmark secor wise & see the differences
As in for Treasury duration contribution is 0.2792 * 5 = 1.40 whereas benchmarks 0.30 * 3.8 = 1.14, the difference is +ve 0.26
for corporate duration contribution : 2.13 (portfolio) - 2.36 (benchmark) = -0.23-----> its -ve & would be the reason for tracking error…
tracking error could be caused by either direction, the larger absolute value of duration, the larger contribution to tracking error. Your formular has proved treasury contribute more.
where did you find the 2011 CFA Mock? is it posted on the CFA wbsite? thanks
This is going to sound bad, but I have to say it… I always secretely thought that when chinese people said “formular” they just pronounced it that way, i didn’t know they were really spelling it with an “r” in their heads!
On a serious note, I don’t like this question, and I have noticed on more than one occasion that CFAI seems to treat spread duration differently than duration with regards to tracking error, and if the question does not specifically say which contribution from “SPREAD DURATION” contributes most to tracking error, I would say it is too vague. Last year I just decided to always pick the one that had the highest spread duration despite what duration mismatches there were just beause thats the way they had answered them in examples, but there seems to be no systematic way to determine what is actually correct. Level 3 is riddled with errors and it’s pretty frustrating.
@markCFAIL, haha, pronouncation leads my spelling.
Yes, you are right, it’s CFAI’s problem. Anyway, it’s their examination.
Where is this exam? is it on CFAI’s website?
Where is this exam? is it on CFAI’s website?
Where is this exam? is it on CFAI’s website?
Where is this exam posted?
gotta phone a friend dude - it’s not availalbe on CFAI website anymore
This was errata. Search for 2011 mock scores and you will see we discussed it already. Correct answer is A as it is written. Correct answer is C with the errata change.
Agrred with rahuls.
Sector, duration contribution(PORTFOLIO), duration contribution(BMK) ------------------------------------------------------------------------------------------------ Treasury, 1.396, 1.140 MBS, 0.916, 0.916 Corp, 2.129, 2.355 ----------------------------------------------------- Total 4.44, 4.41 Basically, you can’t decide whether Treasury or Corp contribute more to duration mismatch. Spread duration does. We don’t hve time to calc all this during the exam, though. As an intuitive thought, total duration is not provided on purpose and keep the question straightforward.
^^^^