If Investors Rely Strictly on Modified Duration to Estimate the Percentage

question 66

Multiple Choice

If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.

• A)underestimate; underestimate
• B)overestimate; overestimate
• C)underestimate; overestimate
• D)overestimate; underestimate

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Definitions:

Worldview II

A person’s or group’s comprehensive outlook or perspective on life and the world around them, distinguished here as a second version or interpretation.

Operationalization

The process of defining the measurement of a phenomenon that is not directly measurable, by assigning it a quantitative value.

Tenacity

The quality or state of being very determined and persistent in pursuing goals.

Intuition

An immediate understanding of knowledge without the need for conscious reasoning.