medium · FRM Part 2 Market Risk
A fixed-income portfolio consists of a 2-year zero-coupon bond and a 10-year zero-coupon bond. The risk team performs VaR mapping to simplify the risk factor set.
If they map the portfolio using only the Macaulay duration of the total portfolio to a single vertex on the yield curve, what risk are they most likely to understate?
- Parallel shift risk across the yield curve.
- Specific credit risk tied to the bond's issuer.
- Convexity risk arising from small parallel rate moves.
- Curve steepening or flattening risk (Slope risk).
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