I think i’m just tired but maybe not. Example says the investor chooses a tactical portfolio combining equal long positions in the IG (A and Baa) bonds and short positions the HY bonds (Ba and B) bonds.
The answer finds all four excess spreads and goes:
Tactical portfolio = (0.99 + 1.05)/2 - (1.85 + .50)/2) = -0.16
What does equal mean here? I thought everything at all 4 credit ratings is equally allocated.
Tactical = [0.99/4 + 1.05/4] - [1.85/4 + 0.5/4]
Must be tired but very confused.
I just stared at this for a while and this really has to be wrong. Being tactical just means we go long and short. Every rating should only have a 25% tactical allocation. But they divide only by 2 which makes no sense.
If i’m wrong here, I think I might have to defer exam. But I can’t find this mistake online anywhere so I think im wrong.
Equal long positions (half A, half Baa), equal short positions (half Ba, half B).
Ohh, I think. haha.
The allocation does not need to add to 100% then for all four categories?
I guess I was thinking more like asset allocation where it must add to 100% for all 4. We’re just saying, the long position is 50% category A and Baa. And completely separate the short position is 50% Ba and B.
Am I more on track now? Always as normal, very nice and helpful. Appreciate it a lot.
You are, indeed!
My pleasure.