Portfolio managers who anticipate an increase in interest rates should
A) act to keep the duration constant.
B) decrease the portfolio duration.
C) increase the portfolio duration.
D) assume higher risk in the market.
E) invest in junk bonds.

Question

Quizplus · Accepted Answer

When interest rates are expected to rise, portfolio managers should decrease the portfolio duration in order to reduce the sensitivity of the portfolio's value to interest rate changes. This is because as interest rates rise, bond prices tend to fall, and longer-term bonds tend to be more sensitive to interest rate changes than shorter-term bonds. Therefore, decreasing the portfolio duration helps to mitigate the potential negative impact of rising interest rates on the portfolio's value.

Portfolio Managers Who Anticipate an Increase in Interest Rates Should