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Answer: DV01: 4,971; Convexity: 276
**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: $$\frac{1,962,000}{1,962,000 + 4,216,000 + 6,322,000} \cdot 108 + \frac{4,216,000}{1,962,000 + 4,216,000 + 6,322,000} \cdot 75 + \frac{6,322,000}{1,962,000 + 4,216,000 + 6,322,000} \cdot 463 = 276.41$$ 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
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