Answer: Bullet outperforms barbell

## Explanation When there is a **LARGE parallel shift** in the yield curve, the **bullet portfolio outperforms the barbell portfolio**. ### Key Concepts: - **Barbell Strategy**: Invests in short-term and long-term bonds, avoiding intermediate maturities - **Bullet Strategy**: Concentrates investments in bonds with similar maturities (typically intermediate-term) ### Why Bullet Outperforms with Large Parallel Shifts: 1. **Convexity Effect**: - Barbell portfolios typically have higher convexity due to the combination of short and long duration bonds - Higher convexity is beneficial for **non-parallel yield curve shifts** and **small parallel shifts** - However, for **large parallel shifts**, the higher convexity of barbell portfolios becomes less advantageous 2. **Duration Matching**: - When comparing barbell vs bullet strategies with the same duration - For large parallel shifts, the bullet portfolio's concentrated maturity structure provides better performance 3. **Price Sensitivity**: - Large parallel shifts affect all maturities equally - The bullet portfolio's focused maturity structure results in more predictable price behavior - Barbell portfolios may experience offsetting effects between short and long positions ### Mathematical Insight: The performance difference relates to the **second-order effect** of convexity. While barbells have higher convexity (beneficial for small changes), for large parallel shifts, the linear duration effect dominates, making bullet strategies more effective. **Answer: B - Bullet outperforms barbell**

Author: LeetQuiz .