Learning Module 2 Fixed-Income Active Management: Credit Strategies - Practice Problems Q20

CFA Level III Fixed Income
#1

An investor is considering the portfolio impact of a new 12-year corporate bond
position with a $75 million face value, a 3.25% coupon, current YTM of 2.85%,
modified duration of 9.887, and a price of 104.0175 per 100 of face value.

Which of the following VaR measures is most appropriate for the portfolio manager
to use to evaluate how this position would affect portfolio tail risk?
A. CVaR
B. Relative VaR
C. Incremental VaR

C is correct. The incremental VaR measures how the additional portfolio position
would change the overall portfolio’s VaR measure.

I strongly feel it should be A. CVaR

#2

“considering the portfolio impact” - therefore incremental VAR

CVAR - measures the average loss over a specific time period
conditional on that loss exceeding the VaR threshold

Why is CVAR the correct choice.

If you feel strongly do you have 2 points you could use to justify your answer as per a CFA L3 question.

#3

you’re right, CVaR is not appropriate for adding a new position