Answer the question:
Q1 :
If required yield falls from 7% to 6.1%, use duration calculated duration the price changes for each bond. (based on the calculation part done below).
explain whether these calculated price changes are precise.(50 words)
discuss the action that a bond portfolio manager should take in this situation. (100 words)
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present values:
Bond 1 p= 1067.75 £
Bond 2 p= 666.34 £
Bond 3 p= 1000 £

Macaulay duration
Bond 1 D1 = 3.55 years
Bond 2 D2 = 6 years
Bond 3 D3 = 2.81 years

Modified duration
Bond 1 MD1 = 3.32 years
Bond 2 MD2 = 5.61 years
Bond 3 MD3 = 2.63 years

If required yield falls from 7% to 6.1%, the price changes for each bond is:
Bond 1 AP = 31.9 £
Bond 2 AP = 33.6 £
Bond 3 AP = 23.7 £
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Q2:
You are given the following information on the performance of a fund and on the market: Return on the portfolio rp= 17%; total risk of the portfolio σp= 14%; beta of the portfolio βp = 0.85, return on the market rm = 8%; total risk of the market σm = 10%, and the risk-free rate of interest rf = 2%. The client-desired beta is given as βc = 0.6. Decompose the portfolio’s total return to identify the sources of the fund manager’s performance. Interpret your results. (30 words)