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) 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 impact of a portfolio's investment policy, including factors such as duration, credit quality, and sector allocation, on its performance relative to a benchmark. The difference in portfolio duration and index duration is one of the factors that can contribute to the policy effect, as it reflects the portfolio's intentional deviance from the benchmark's characteristics. The other choices do not accurately describe the policy effect.

In the Evaluation of Bond Portfolio Performance, the Policy Effect