Reading 24 Example 7

CFA Level III Portfolio Management
#1

MegaWorld Bancorp has an equity capital ratio for financial assets of 9%. The modified duration of its assets is 2 and of its liabilities is 1.5. Over small changes, the yield on liabilities is expected to move by 85 bps for every 100 bps of yield change in its asset portfolio.
What would be impact on the value of shareholder capital of a 50 basis point rise in the level of yields on its asset portfolio?

The answer is 0.5%*(-9.33) , which is the Change of asset return (0.5%) multiple the duration of shareholder capital(-9.33). But I think we should calculate the Change of the shareholder capital return instead, which is (1/9%)*0.5%.
Am I missing something?

#2

Think of it in Fixed Income when calculating % change in portfolio value due to change in yield → -(ModDur * change in yield)

(A/E) here is degree of leverage, so not sure how multiplying that with change in yield will produce the impact on value of shareholder capital.

#3

Thanks for your reply. When calculating the duration of shareholder equity, the impact of the leverage (A/E) has already been considered. So we can just use the duration of equity multiply the yield change of the asset to determine the the change of shareholder capital?

#4

Yup.

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