Please help me with the choice of portfolio based on the data given?
Increased economic activity and inflation. She observes that consumer spending, business investments, and government expenditures are all rising. In response to these positive indicators, Emma expects the Bank of Canada (BoC), to take a proactive stance by implementing interest rate hikes. These rate increases would aim to moderate the economic activity and control inflation.
James Miller is the head of US Fixed Income portfolio management for Summit Investment Management. The US, unlike Canada, is experiencing a sluggish economy with weak consumer spending and low business investments. Miller expects that the Federal Reserve (Fed) will adopt an accommodative stance by cutting interest rates to stimulate the economy. He expects all the rates (2-year, 5-year, 10-year, and 20-year) would go down by 20 bp, however, the 2-year rate would go down by an additional 30 bp, and the 20-year rate by an additional 10 bp. Miller presents key rate duration data for the index and three prospective portfolios to the investment committee, as shown in Exhibit 1.
Exhibit 1
| Tenor | Benchmark | Portfolio 1 | Portfolio 2 | Portfolio 3 |
|---|---|---|---|---|
| 2-Year | 1.50 | 1.80 | 1.20 | 1.50 |
| 5-Year | 2.50 | 2.70 | 2.50 | 2.60 |
| 10-Year | 3.50 | 3.60 | 3.50 | 3.50 |
| 20-Year | 4.50 | 4.30 | 4.50 | 4.40 |