Bonds A and B both have a duration of exactly one year.An equally-weighted portfolio of these bonds will have a duration of
A)Greater than 1 year because duration is additive.
B)Equal to one year because the average duration is still one year.
C)Less than one year,because duration is a measure of risk,and combining two bonds into a portfolio diversifies away risk.
D)Cannot say because the outcome depends on the interaction of specific cash flows of both bonds.

Question

Quizplus · Accepted Answer

The duration of an equally-weighted portfolio of two bonds, each with a duration of exactly one year, will also be one year. This is because duration, in this context, averages out across the portfolio components when they are equally weighted.

Bonds a and B Both Have a Duration of Exactly