Final answer:
The duration of a bond portfolio is calculated as the value weighted average of the durations of the individual bonds, reflecting their proportional market value and sensitivity to interest rate changes.
Step-by-step explanation:
The duration of a portfolio of bonds can be calculated as the value weighted average of the durations of the individual bonds in the portfolio. This means that each bond's duration is multiplied by the proportion of the portfolio's total market value that the bond represents.
Duration is an important measure for investors as it indicates how sensitive a bond or portfolio of bonds is to interest rate changes. In the context of bond investment, duration measures the bond's price sensitivity to yields, reflecting how much the bond's price will change with a given change in interest rates. A higher duration implies greater sensitivity to interest rates changes, and vice versa.
The value-weighted approach to calculating duration takes into account the size of each bond holding within the portfolio, which is why larger positions in the portfolio will have a greater impact on the portfolio's overall duration.