2.) Which of Whitney's statements with regard to implementing its market and interest
rate views is least likely correct?
A. Statement 2
B. Statement 3
C. Statement 1
Answer = A
"Fixed-Income Portfolio Management – Part I," H. Gifford Fong and Larry D. Guin
Sections 3.2.2, 4.1.1.6
The statement regarding key rate durations is incorrect. Key rate duration is one
established method for measuring the effect of shifts in key points along the yield curve.
In this method, the spot rates are held constant for all points along the yield curve but
one. By changing the spot rate for that key maturity, a portfolio's sensitivity to a change
in that maturity can be measured. The process can be repeated for other key points
(e.g., 3, 7, 10, and 15 years) to measure their sensitivities as well. Simulations of twists
in the yield curve can then be conducted to see how the portfolio would react to these
changes.
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