32. Which of Whitney’s Statements with regard to implementing its market and interest rate
views is least likely correct?
A. Statement 1
B. Statement 2
C. Statement 3
Answer = B
“Fixed-Income Portfolio Management – Part I,” H. Gifford Fong and Larry D. Guin
2013 Modular Level III, Vol. 4, Reading 23, Section 3.2.2; 4.1.1.6
Study Session 9–23–d, h
Describe and evaluate techniques, such as duration matching and the use of key rate durations,
by which an enhanced indexer may seek to align the risk exposures of the portfolio with those of
the benchmark bond index;
Explain the importance of spread duration.
B is correct because 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, we hold the spot rates constant for all points along the yield curve but one. By
changing the spot rate for that key maturity, we are able to measure a portfolio’s sensitivity to a
change in that maturity. We repeat the process for other key points (e.g., 3, 7, 10, 15 years) and
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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