In the evaluation of bond portfolio performance,the interest rate anticipation effect refers to
A) The difference in portfolio duration and index duration.
B) The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk.
C) Short-run changes in the portfolio during a specific period.
D) The differential return from changing duration of the portfolio during a specific period.
E) None of the above

Question

Quizplus · Accepted Answer

The interest rate anticipation effect refers to the differential return from changing duration of the portfolio during a specific period. It is the result of taking advantage of short-term interest rate movements by adjusting portfolio duration. Therefore, D is the correct answer as it directly relates to this effect. A refers to the difference in portfolio and index duration, which is not the focus of the interest rate anticipation effect. B refers to the effect of acquiring mispriced bonds, which is unrelated to interest rate anticipation. C refers to short-run changes in the portfolio, which is not specific to the interest rate anticipation effect. E refers to none of the above as none of the options describe the interest rate anticipation effect accurately.

In the Evaluation of Bond Portfolio Performance,the Interest Rate Anticipation