Explanation:
The correct answer is B.
The liquidity duration of a portfolio as a whole can be estimated by weighting each security’s liquidity duration by that security’s weight in the portfolio. This approach takes into account the fact that different securities may have different weights in the portfolio, and thus their individual liquidity durations will have different impacts on the overall liquidity duration of the portfolio. By weighting each security’s liquidity duration by its weight in the portfolio, we can obtain a more accurate estimate of the portfolio’s overall liquidity duration. This method is consistent with the principles of portfolio theory, which emphasize the importance of considering the weights of
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Q.2532 An estimate of liquidity duration for the portfolio taken as a whole can be derived by:
A
Adding each security’s liquidity duration.
B
Weighting each security’s liquidity duration by that security’s weight in the portfolio.
C
Computing the average of the securities liquidity duration in the portfolio.
D
Weighting each security’s liquidity duration by its market capitalization.
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