Question

Spice asks Meyers about how a fixed-income manager would position his portfolio to capitalize on expectations of increasing interest rates. Which of the following would be the most appropriate strategy?a. Shorten his portfolio duration.b. Buy fixed-rate bonds.c. Lengthen his portfolio duration.

Answer 1

a. Shorten his portfolio duration

Step-by-step explanation:

The best action to take in order to capitalize on expectations of increasing interest rates would be to shorten his portfolio duration. This is because an increase in the interest rate causes his portfolio value to decrease, yet if the duration of his portfolio is shortened then the change/decrease in value will be lesser than if done otherwise.