LOS l: Compare and contrast risk minimization with return maximization in immunized portfolios.

Q1. The manager of a bond portfolio must immunize the portfolio with respect to a given set of liabilities. The manager is choosing between two immunization strategies: Strategy A and Strategy B. Strategy A has a lower return, lower risk, and a 99% probability of providing the required return to meet the given set of liabilities. The manager should choose Strategy B:

A)   under no circumstances, because risk minimization is the point of immunization.

B)   if that strategy’s higher risk is justified by the higher return, and the probability of meeting the liabilities is equal to or only slightly lower than that of Strategy A.

C)   if that strategy’s higher risk is justified by the higher return, and only if the probability of meeting the liabilities is equal to or higher than that of Strategy A.

Q2. The manager of a bond fund is assessing several choices in attempting to immunize a portfolio to meet a lump-sum liability. If maximizing the return of the portfolio by taking on more risk with active management is the goal of the manager, then the manager should:

A)   choose a portfolio with a low and positive cushion spread.

B)   choose a portfolio with a high and positive cushion spread.

C)   not consider immunizing the portfolio at all because maximizing return is incompatible with immunization.

Q3 .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 five percent 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)   5.6% with a 95% confidence interval at +/- 50 basis points.

B)   5.2% with a 95% confidence interval at +/- 20 basis points.

C)   6.0% with a 95% confidence interval at +/- 100 basis points.

LOS l: Compare and contrast risk minimization with return maximization in immunized portfolios. fficeffice" />

Q1. The manager of a bond portfolio must immunize the portfolio with respect to a given set of liabilities. The manager is choosing between two immunization strategies: Strategy A and Strategy B. Strategy A has a lower return, lower risk, and a 99% probability of providing the required return to meet the given set of liabilities. The manager should choose Strategy B:

A)   under no circumstances, because risk minimization is the point of immunization.

B)   if that strategy’s higher risk is justified by the higher return, and the probability of meeting the liabilities is equal to or only slightly lower than that of Strategy A.

C)   if that strategy’s higher risk is justified by the higher return, and only if the probability of meeting the liabilities is equal to or higher than that of Strategy A.

Correct answer is B)         

In immunizing a portfolio a manager must consider a trade off between risk minimization and return maximization. Taking on extra risk under the indicated circumstances is appropriate. The probability of not meeting the liabilities can be allowed to decrease a little. There is no strict rule about the return and risk levels remaining “proportional”.

Q2. The manager of a bond fund is assessing several choices in attempting to immunize a portfolio to meet a lump-sum liability. If maximizing the return of the portfolio by taking on more risk with active management is the goal of the manager, then the manager should:

A)   choose a portfolio with a low and positive cushion spread.

B)   choose a portfolio with a high and positive cushion spread.

C)   not consider immunizing the portfolio at all because maximizing return is incompatible with immunization.

Correct answer is B)         

Maximizing return is not incompatible with immunization. The manager can engage in more active trading to maximize return when the cushion spread is higher.

Q3. 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 five percent 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)   5.6% with a 95% confidence interval at +/- 50 basis points.

B)   5.2% with a 95% confidence interval at +/- 20 basis points.

C)   6.0% with a 95% confidence interval at +/- 100 basis points.

Correct answer is A)

Of the three portfolios, the portfolio with a 5.6% target return and a +/-50 basis point confidence interval has the best chance of achieving the needed return. The chance of not meeting the 5% return is LESS THAN (1-95%)/2 = 2.5% because, the 95% interval does not include the target 5%. The portfolios with the 6% target return and 5.2% would have exactly a 2.5% probability of not achieving the goal.

[此贴子已经被作者于2009-3-6 9:11:05编辑过]

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