Assignment -
You are a portfolio manager for Vandelay Capital Management's Investment Grade Bond Fund. You think that interest rate spreads are going to widen soon. (BBB-UST, for example.)
Change the Spread Matrix in Case #2 to reflect your views. Things to consider: do all spreads widen by the same amount? Or by different amounts. Explain why you changed the spread matrix the way you did.
The key parts of this problem involve Cases #3 and #4. You want to change your porfolio to reflect your views that spreads will soon widen. No guts, no glory.
Change your asset allocation by adjusting Case #3. You can do this in two ways. The first is: adjust the par amounts, i.e., change the equal par weighting. The second way is: choose the portfolio duration and portfolio convexity you want. Then use Solver to find the asset weights that attain your portfolio objectives. Explain why you changed the portfolio as you did.
Then take the weights from Case #3 and enter them into Case #4. Then change the spread matrix for Case #4, just as you did in Case #2.
Compare portfolio duration and portfolio convexity for Cases #1 and #3.
Then compare portfolio duration and portfolio convexity for Cases #2 and #4.
How much did your aggressive portfolio reallocation save your clients?
Attachment:- Assignment File.rar