2011 Mock PM Q 33 tracking error corporate, question, relative

skycfa

The answer is C - corporate since it contributes the spread duration.
however, the question is asking “which sector that poses the most tracking error relative to the benchmark”, personally I think it is A - Treasury, since the dollar duration of Treasury with benchmark is the bigger than corporate.
what’s your view?

Sunshine4ever

Treasury have zero spread duration

hardwork24

yeah, I know. But duration does not mean “spread duration” only. Given the duration of treasury is 5, it also contribute the tracking error if the yield curve move downward or upward parellel. right?

svgleeson

contribution from spread duration is what the question is about
since spread duration of treasury is 0 - contribution is 0.

jmh530

I think you are right on with this.
The question is about tracking error vs a benchmark, not spread duration.  Page 19 of CFAI book 4 lists the 7 primary drivers of tracking error in a bond portfolio.  Having a higher duration Treasury portfolio vs the bm certainly qualifies as a driver of tracking error.
I think answer could be A or C.

ba736

Thanks ftwcfa, I totally agree with you. That’s why I’m confused.

cchang

Even then its C
calculate the wt avg duration of the portfolio & benchmark secor wise & see the differences
As in for Treasury duration contribution is 0.2792 * 5 = 1.40 whereas benchmarks 0.30 * 3.8 = 1.14, the difference is +ve 0.26
for corporate duration contribution :  2.13 (portfolio) - 2.36 (benchmark) = -0.23—– its -ve & would be the reason for tracking error…

Carson

tracking error could be caused by either direction, the larger absolute value of duration, the larger contribution to tracking error. Your formular has proved treasury contribute more.

siavosh

where did you find the 2011 CFA Mock? is it posted on the CFA wbsite? thanks

pawn

@markCFAIL, haha, pronouncation leads my spelling.  
Yes, you are right, it’s CFAI’s problem.   Anyway, it’s their examination.