Ferro case

CFA Level III Fixed Income
#1

Q 26- I picked c- expected return. That looked weird to me. The answer given does not make sense to me:

Excess returns represent the difference, positive or negative, between the total return of all credit securities and Treasury securities along a set of key rate duration points across the term structure. This single statistic, excess return, therefore normalizes for the duration differential among debt asset classes, in this case between longer-duration credit and shorter-duration Treasuries.

Can anybody explain?

#2

???

#3

use an example.

somewhere you have positive duration (where duration > benchmark)

somewhere else on the same portfolio you have negative duration (duration < benchmark)

the two taken together normalize and get the total towards 0 …

#4

Two points

  1. along a set of key rate duration points across the term structure- what is that to do with excess returns? Excess retruns can be from any point not just the key points?

  2. How excess return normalizes duration?

#5

you need to read without missing key words… excess return normalizes DURATION DIFFERENTIAL.

I see the exact same statement that you have shown up here in a case on the text on Pg 63 (under the exhibit 1 on Reading 21 (Relative value Methodologies).