easy · Certified Financial Planner Risk Management
A client presents a portfolio with a current value of 1,200,000 and a weighted average duration of 7.4 years. If market interest rates rise by 1%, the linear estimate suggests a price drop of88,800.
What is the most accurate statement regarding the true price change of the portfolio?
- The actual price will be lower than $1,111,200 because convexity accelerates losses.
- The actual price will be exactly $1,111,200 because duration is a precise measure of risk.
- The actual price will be slightly higher than $1,111,200 due to convexity.
- The price change cannot be determined without knowing the portfolio's beta.
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