G.1.5 Portfolios and Passage of Time

Question 1

how can we calc the duration of a portfolio?

Answer 1

Two Methods:

1. Determine the total cash flow of the entire portfolio at each time t, and then use MacD or ModD summation formulas.
2. Compute the weighted (by price) average of the MacD or ModD values of the portfolio components.

Question 2

what is a portfolio intuitively?

Answer 2

A portfolio is a collection of investments that a person or organization holds. It can include a variety of asset types, such as stocks, bonds, real estate, and other investments

Question 3

what is the formula for the duration of a portfolio of assets?

Answer 3

MacD_P = (P_1 * MacD_1 + P_2 * MacD_2 + … + P_n * MacD_n)/(P_1 + P_2 + … + P_n)

Question 4

what cash flows are considered when you are computing durations?

Answer 4

Only future cash flows

Question 5

what happens to the duration of a portfolio when a cash flow occurs?

Answer 5

The duration of the portfolio will incrase since the cash flow is no longer a future cash flow

Question 6

suppose a portfolio has future cash flows, but no cash flows occur over the next period of time.

What can you say abt the duration of the portfolio during this next period of time?

Answer 6

With no cash flows occurring, the duration will decrease constatnly as time progresses