If a financial institution has 50 percent of its portfolio in a bond with a five-year duration and 50 percent of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?
A) 12 years
B) 7 years
C) 6 years
D) 5 years

Question

Quizplus · Accepted Answer

To calculate the duration of the portfolio, we need to take the weighted average of the individual bond durations, where the weights are the proportion of the portfolio invested in each bond.

Duration of the 5-year bond = 5 years 
Duration of the 7-year bond = 7 years

Weight of the 5-year bond = 50% 
Weight of the 7-year bond = 50%

Duration of the portfolio = (0.5 x 5) + (0.5 x 7) = 3.5 + 3.5 = 7 years

Therefore, the duration of the portfolio is 7 years (Option B).

If a Financial Institution Has 50 Percent of Its Portfolio