G.2.2 Macaulay Convexity and Portfolios

Question 1

what is the derivative formula for MacC?

Answer 1

MacC = P”_δ/P_δ

Question 2

what is summation formula for MacC?

Answer 2

MacC = (SUM(t^2 * A_t)) / (SUM(A_t))

Question 3

what is the approach for finding the convexity of portfolio of assets?

Answer 3

The convexity of the portfolio is the weighted average of the convexities of the assets, weighting by the prices of the assets

Question 4

how do you find the convexity of a portfolio?

Answer 4

1. Determine the total cash flow of the entire portfolio at each time t, and then use Convexity or MacC summation formulas.

or

2. Compute the weighted (by price) average of the Convexity or MacC values of the portfolio component