Answer: assumes the yield curve shifts in a parallel manner.

## Explanation When computing the duration of a bond portfolio as a weighted average of time to receipt of aggregate cash flows (also known as Macaulay duration), a key limitation is that it **assumes the yield curve shifts in a parallel manner**. This means it assumes that interest rates for all maturities change by the same amount. ### Key Points: 1. **Parallel Yield Curve Shift Assumption**: Duration measures are based on the assumption that when interest rates change, they change by the same amount across all maturities. In reality, yield curves rarely shift in a perfectly parallel fashion. 2. **Theoretical Validity**: Option A is incorrect because this method is theoretically valid for measuring interest rate sensitivity under the parallel shift assumption. 3. **Practical Application**: Option B is incorrect because duration is actually widely used in practice despite its limitations. 4. **Real-World Limitations**: In practice, yield curves can: - Steepen (long-term rates rise more than short-term rates) - Flatten (short-term rates rise more than long-term rates) - Twist (some maturities rise while others fall) 5. **Alternative Measures**: For non-parallel shifts, more sophisticated measures like: - Key rate duration - Effective duration - Convexity adjustments are needed to better capture interest rate risk. **Correct Answer: C** - The weighted average duration approach assumes parallel yield curve shifts, which is a significant disadvantage in real-world applications where yield curve movements are often non-parallel.

Author: LeetQuiz .