An example of duration risk is where the yield curve is initially flat,but then shifts in an upward direction.

Question

Quizplus · Accepted Answer

Traditional immunisation procedures may obscure the problems of duration risk and convexity,which can be important in portfolio construction and management.Duration risk arises when there are non-parallel shifts in the yield curve (see Reitano 1992).However,to a large extent these problems can be overcome with regular rebalancing of the portfolio to ensure the required duration is maintained,although this increases transaction costs.Note: there is an inherent trade-off between the frequency of rebalancing and the level of transaction costs.

An Example of Duration Risk Is Where the Yield Curve