In the evaluation of bond portfolio performance, the policy 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) To 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 policy effect refers to the difference in portfolio duration and index duration, which is a measure of how well the portfolio aligns with the investor's specific goals and risk preferences. It is different from other measures of portfolio performance such as alpha, which is the extra return attributable to acquiring bonds that are temporarily mispriced relative to risk, or changes in portfolio duration, which indicate short-term adjustments. Therefore, option (A) is the correct choice.

In the Evaluation of Bond Portfolio Performance, the Policy Effect