The Following Information Relates to Questions
Katsuko Zhao and Johan

question 26

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.
$\begin{array}{l}\text { EXHIBIT } 1 \text { Allocations for Current and Alternative Portfolios }\\\begin{array} { l c c c } \hline \text { Remaining Term } & \text { Current } & \text { Alternative 1 } & \text { Alternative 2 } \\\hline 2 \text { years } & 33.33 \% & 0.00 \% & 50.00 \% \\10 \text { years } & 33.33 \% & 100.00 \% & 0.00 \% \\20 \text { years } & 33.33 \% & 0.00 \% & 50.00 \% \\\hline\end{array}\end{array}$
-Calculate the total expected return for the bullet and barbell portfolios presented in ex-hibit 3. Show your calculations. Identify the component factor that contributes most ofthe outperformance of the higher-performing portfolio.template :
Calculate the total expected return for the bullet and barbell portfolios presented in exhibit 3. Showyour calculations.Identify the component factor that contributes most of the outperformance of the higher-performing
portfolio.

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Definitions:

Stock Dividend

A dividend paid to shareholders in the form of additional shares of the company's stock, rather than in cash.

Market Price

The current price at which an asset or service can be bought or sold in the open market.

Retained Earnings

The portion of net income that is retained by a corporation rather than distributed to its shareholders as dividends, often used for reinvestment.

Other Comprehensive Income

A component of shareholders' equity that reflects the changes in net assets of a company not recognized in the profit or loss for a period.