Can someone explain 2012 AM exam Q8A?
The question asks to increase bond exposure and decrease duration
Current portfolio has 98M in bonds with a duration of 7.2 and wants to increase allocation to 126M with a duration of 6
So to increase bond allocation you’d want the allocation to have a duration of 6 since that is your target. So I did this
(126M-98M)/103,000 * (6-0)/7.7
but the answer suggests that you do it this way
(126M-98M)/103,000 * (7.2-0)/7.7
Why would you use 7.2 as your target duration when you want the bond portfolio to have a target duration of 6? Wouldn’t using 7.2 as a target duration make the synthetic portion of the portfolio have a duration of 7.2 and not 6?