Yield Curve & Portfolio Duration

CFA Level III Fixed Income
#1

In the curriculum book it says " When the yield curve is upward sloping, the average duration is less than the portfolio duration "

I’m not sure what it means ?!

#2

Anyone?

#3

page number ?

#4

Ok found it !

First things first:

You have 2 approaches you can use in the context of Asset-Liability management:

  1. Portfolio Statistic Approach (based on portfolio aggregate cash flows and IRR)

  2. Traditional weighted average calculation (based on each bond YTM and Duration)

The average calculations method is less accurate than the portfolio statistic method

Now:

When the yield curve is upward sloping, portfolio duration (Portfolio statistic method) is higher than the bonds average duration (traditional method) because portfolio statistic method reflect all cash flows and return to be received while traditional weighted average method is taking the mid point. Also longer maturity bonds will impact the portfolio for a longer time.

For all these reason average duration will be less than the portfolio duration.

#5

What page?

#6

I dont’ remember reading anything like this. Portfolio statistic method?

#7

Volume 4 p.56

#8

Look at page 54.

There is no such thing as Portfolio Statistic Method, per se. What i meant to say: the method used to reach the portfolio statistics