) 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