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 average duration of the equally-weighted portfolio of the two bonds will still be one year because the weights are equal for both bonds which makes the portfolio's duration equal to their average.

Bonds a and B Both Have a Duration of Exactly