75%. THIS IS ABOVE LERIDA’S REQUIRED RATE OF RETURN OF 25%. THE...

6.75%. This is above Lerida’s required rate of return of 6.25%. The duration of the portfolio will be equal to the duration of the liabilities and we will manage the portfolio with an expectation of beating the Barclays Capital U.S. Aggregate Bond Index.” Exhibit 1 presents key characteristics of Lerida’s portfolio for the current period and from one year ago. Since rates have shifted over this period, Monts informs Lerida that an additional investment must be made to rebalance the portfolio and reestablish the original dollar duration. Monts plans to rebalance using the existing security proportions. Exhibit 1 Fondo de Pension Lerida Portfolio Characteristics Sector Market Value (€000’s) Duration (years) One Year Ago Current One Year Ago Current Treasury 42,000 40,950 5.4 5.0 Mortgage (MBS) 37,000 36,316 3.9 3.7 Corporate “Bullets” 71,000 69,403 4.7 4.5 Monts will rebalance the portfolio by investing in securities that her research group has identified as providing the most attractive total return potential. Sector allocations for her portfolio and the benchmark, are presented in Exhibit 2. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose. Exhibit 2 Sector Weightings Portfolio Benchmark Contribution to Spread % of Duration Sector Portfolio Duration Duration Treasury 27.92 5.0 0.00 30.00 3.8 0.00 Mortgage - MBS 24.76 3.7 0.92 22.90 4.0 0.92 Corporate 47.32 4.5 2.13 47.10 5.0 2.37 Total 100.00 3.05 100.00 3.29 Monts also uses security selection in addition to sector rotation as sources of alpha and is evaluating several new trades. At the portfolio review meeting, Monts makes the following statements: Statement 2: “I am concerned that certain types of securities in the portfolio pose a risk of not providing sufficient cash flow to pay liabilities when they come due. The allocation to mortgage-backed securities in the portfolio, for instance, exposes us to contingent claims risk. We should therefore increase the allocation to non-callable fixed-rate corporate bonds, which do not expose us to contingent claims risk.” Statement 3: “Our research team anticipates that the credit fundamentals of most issuers will deteriorate over the coming months as the economy contracts. The market consensus is not in line with our view yet and spreads do not reflect the proper valuation.” Statement 4: “Structural analysis of corporate bonds is a key part of our research process. Given Girona’s view that interest rates are in secular decline, we expect callable bonds to outperform bullets. In the event interest rates rise sharply, put structures will provide investors with some protection.”