andytrader

Why should total return analysis be used to assess the potential performance of a trade before the trade is implemented? Because total return analysis:

A) can be used to assess the likelihood of a certain outcome which will affect the potential performance of a trading strategy.

B) identifies the range of possible outcomes and therefore provides the manager with a feel for the risk associated with a trade.

C) allows to quantify the potential performance of any trading strategy.

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Total return analysis can be used with scenario analysis to assess the potential performance and risk associated with the wide variety of bond investment strategies. Total return analysis may be used to determine the potential performance, and scenario analysis may be used to ascertain how the performance will vary under different sets of assumptions.

andytrader

Why should scenario analysis be used to assess the potential performance of a trade before the trade is implemented? Because scenario analysis:

A) consists of evaluating the worst-case scenario which enables an investor to know his highest potential loss of a trade.

B) identifies the range of possible outcomes and therefore provides the manager with a feel for the risk associated with a trade.

C) involves measuring the reactions of market participants under a variety of different scenarios which the manager needs to know before he makes a trade.

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Total return analysis can be used with scenario analysis to assess the potential performance and risk associated with the wide variety of bond investment strategies. Total return analysis may be used to determine the potential performance, and scenario analysis may be used to ascertain how the performance will vary under different sets of assumptions.

andytrader

Potential performance and how that performance will vary can be assessed by which two factors, respectively?

A) Trend analysis, scenario analysis.

B) Total return analysis, scenario analysis.

C) Scenario analysis, total return analysis.

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Potential performance can be estimated with total return analysis, and how that performance will vary can be estimated with scenario analysis.

andytrader

A manager of a bond fund wishes to ensure funding of a predetermined liability. Contingent immunization is possible when the prevailing available immunized rate of return is:

A) greater than the required rate to ensure the funding, and it works best if interest rates stay the same or increase.

B) lower than the required rate to ensure the funding, and it works best if interest rates stay the same or decline.

C) greater than the required rate to ensure the funding, and it works best if interest rates stay the same or decline.

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Contingent immunization is only possible if the prevailing available immunized rate of return is greater than the required rate to ensure the funding. It works best if rates stay the same or decrease because the need to actually fully immunize never occurs.

andytrader

The manager of a bond fund is assessing several choices in attempting to immunize a portfolio. To meet a predetermined liability, the manager needs a 6% return. Which of the choices below would be the best in pursuit of that goal? An immunized strategy with a target return equal to:

A) 6.4% with a 95% confidence interval at +/- 40 basis points.

B) 6.0% with a 95% confidence interval at +/- 10 basis points.

C) 6.0% with a 99% confidence interval at +/- 20 basis points.

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Of the three portfolios, the portfolio with a 6.4% target return and a +/-40 basis point confidence interval has the best chance of achieving the specified return. The chance of not achieving that return is (1 - 95%) / 2 = 2.5% or one out of 40. The portfolios with the 6% target return have only a 50% chance of achieving the specified return.

andytrader

The manager of a bond portfolio must immunize the portfolio to meet multiple liabilities over time. To do this the manager needs to:

A) equate the duration of the portfolio with the duration of the composite of liabilities and have the distribution of durations of the portfolio’s assets be narrower than that of the distribution of the liabilities.

B) make the duration of the portfolio higher than the duration of the composite of liabilities and have the distribution of durations of the portfolio’s assets be equal to that of the distribution of the liabilities.

C) equate the duration of the portfolio with the duration of the composite of liabilities and have the distribution of durations of the portfolio’s assets be wider than that of the distribution of the liabilities.

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Necessary conditions to meet multiple liabilities over time are for the durations to be equal and the distribution of durations of the portfolio’s assets to be wider than that of the distribution of the liabilities.

andytrader

A commercial bank takes in short-term deposits and the uses those funds to make longer term loans. As such, the duration of the bank’s assets tends to be longer than the duration of the bank’s liabilities. What will happen when interest rates rise? The bank’s:

A) assets will decrease in value by more than the bank's liabilities causing the bank's equity (surplus) to decrease.

B) liabilities will decrease in value by more than the bank's assets causing the bank's equity (surplus) to increase.

C) assets will increase in value by more than the bank's liabilities causing the bank's equity (surplus) to decrease.

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As interest rates rise, the long-duration assets will decrease in value by more than the short-duration liabilities. As assets decrease in value by more than liabilities, the bank’s equity (surplus) must decline (A=L+E).

andytrader

Which of the following is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index?

A) Spread duration.

B) Value at risk.

C) Portfolio duration.

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Spread duration is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index. The other choices are both absolute measures.

andytrader

Which of the following is an absolute measure of the interest rate sensitivity of a portfolio?

A) Spread duration.

B) Value at risk.

C) Portfolio duration.

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Portfolio duration is an absolute measure of the interest rate sensitivity of a portfolio.

andytrader

If a portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, which measure should she examine?

A) Spread duration.

B) Portfolio duration.

C) Value at risk.

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Since the portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, she should examine spread duration.