) BURG'S STATEMENT REGARDING THE FACTORS HE USES IN SELECTING A BENCHMARK BOND INDEX IS MOST LIKELY
2.) Burg's statement regarding the factors he uses in selecting a benchmark bond index is
most likely:
A.
incorrect regarding credit risk and incorrect regarding market risk.
B.
correct regarding market risk and incorrect regarding income risk.
C. incorrect regarding market risk and correct regarding income risk.
Answer = C
Burg is incorrect regarding market risk. Although market risk should be comparable for
the portfolio and benchmark index, given a normal upward-sloping yield curve, a bond
portfolio's yield to maturity increases as the maturity of the portfolio increases. Because
a long duration portfolio is more sensitive to changes in interest rates, a long portfolio
will likely fall more in price than a short one. Burg's statement on credit risk is correct.
“Fixed-Income Portfolio Management - Part I,” by H. Gifford Fong and Larry D. Guin