Portfolio

Study guides: Exam FM-2, Exam GI-101, Exam INV-101

A portfolio is a collection of financial assets (bonds, stocks, cash flows) held together. In the context of Exam FM, portfolio analysis focuses on:

• Yield Rate of a portfolio: the internal rate of return of the combined cash flows
• Duration of a portfolio: the weighted average of individual asset durations, weighted by market values
• Convexity of a portfolio: the weighted average of individual convexities
• Immunization: structuring a portfolio so its value is protected against interest rate changes

D_{Mod}^{\text{portfolio}} = \frac{\sum_i P_i \cdot D_{Mod,i}}{\sum_i P_i}

Portfolio Duration A portfolio has $40{,}000 in a bond with modified duration 3 years and $60{,}000 in a bond with modified duration 8 years. Find the portfolio's modified duration.

Answer D_{Mod}^{\text{portfolio}} = \frac{40000 \times 3 + 60000 \times 8}{40000 + 60000} = \frac{120000 + 480000}{100000} = 6.0 \text{ years}