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Explanation:
Correct Answer: C
Explanation: C is correct. The DV01 for a portfolio is simply the sum of the DV01s of the components of the portfolio:
1,177 + 1,265 + 2,529 = 4,971
The convexity of a portfolio is the average of the convexities of the instruments within the portfolio weighted by the value of each instrument:
A is incorrect. This incorrectly calculates the portfolio's DV01 as the average of the individual bonds' DV01s.
B is incorrect. This incorrectly calculates the portfolio's DV01 as the average of the individual bonds' DV01s, and incorrectly calculates the portfolio's convexity as the sum of the individual bonds' convexities.
D is incorrect. This incorrectly calculates the portfolio's convexity as the sum of the individual bonds' convexities.
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A market risk analyst at a fixed-income hedge fund is assessing the interest rate risk of a portfolio of bonds. The analyst has the following information about the individual portfolio holdings:
| Bond | DV01 | Convexity | Value (SGD) |
|---|---|---|---|
| 1 | 1,177 | 108 | 1,962,000 |
| 2 | 1,265 | 75 | 4,216,000 |
| 3 | 2,529 | 463 | 6,322,000 |
Given this information, which of the following is closest to the portfolio's DV01 and convexity?
A
DV01: 1,657; Convexity: 276
B
DV01: 1,657; Convexity: 646
C
DV01: 4,971; Convexity: 276
D
DV01: 4,971; Convexity: 646