medium · FRM Part 1
A risk manager is comparing two portfolios, Portfolio A (a bullet strategy) and Portfolio B (a barbell strategy). Both portfolios have an identical effective duration of 6.0 years.
Why might a single effective duration measure fail to predict their relative performance during a yield curve 'twist'?
- The bullet portfolio will always have higher convexity, making duration an unreliable predictor for large interest rate moves.
- Barbell portfolios are essentially immune to non-parallel shifts because their durations are averaged across the curve.
- Effective duration only applies to zero-coupon bonds and cannot be used to compare bullet and barbell strategies.
- Effective duration assumes a parallel shift, whereas a twist involves non-uniform changes across maturities where the portfolios have different sensitivities.
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