The Following Information Relates to Questions
Katsuko Zhao and Johan

question 4

Essay

The following information relates to Questions
Katsuko Zhao and Johan Flander are portfolio managers with cowiler investments, a uS-Mbased company. They are assessing the effect of their yield curve forecasts on their bond port- folios. The yield curve is currently upward sloping. Zhao's portfolio is currently invested in uS treasury securities. Zhao forecasts an instanta- neous parallel downward shift in the yield curve. Zhao considers two alternatives to reposition her current portfolio given her yield curve forecast and assesses the trade-off between convexity
and yield. exhibit 1 presents allocations for the current and two alternative portfolios. The durations of the current and alternative portfolios are closely matched.
$\begin{array}{l}\text { EXHIBIT } 1 \text { Allocations for Current and Alternative Portfolios }\\\begin{array} { l c c c } \hline \text { Remaining Term } & \text { Current } & \text { Alternative 1 } & \text { Alternative 2 } \\\hline 2 \text { years } & 33.33 \% & 0.00 \% & 50.00 \% \\10 \text { years } & 33.33 \% & 100.00 \% & 0.00 \% \\20 \text { years } & 33.33 \% & 0.00 \% & 50.00 \% \\\hline\end{array}\end{array}$
-Determine which alternative portfolio in exhibit 1 would be most appropriate for Zhao
given her yield curve forecast. Justify your selection.
template:
Determine which alternative portfolio in exhibit 1 would be most appropriate for Zhao, given her yield
curve forecast. (circle one)
alternative 1 alternative 2
Justify your selection.
based on Zhao's forecast of an instantaneous parallel downward shift in the yield curve,
she also considers selling a portion of the uS treasury securities in her portfolio and buying
one of the following two investments:
investment 1 a mortgage-backed security (MbS)
investment 2 a near-the-money call option on 20-year treasury bond futures
The effective duration of the resulting portfolio will be closely matched to Zhao's current
portfolio.

---

Definitions:

Distorted Impressions

False or misinterpreted representations of reality based on faulty perceptions or biases.

Heights

A measurement of how tall a person, object, or geographical feature is, typically measured from base to top.

Graphical Excellence

The effective display of data that maximizes the reader's understanding and ability to discern patterns or insights, with accuracy and simplicity.

Univariate

Referring to the analysis of data involving only one variable.