Question

If the benchmark duration is 5, what duration are you targeting in rising rate environment? Why?

Answer 1

Duration is the measure of interest rate sensitivity which involves increasing the portfolio's duration if the interest rates are expected to fall and reducing duration if interest rates are expected to rise. If the benchmark duration is 5 and you are targeting a rising rate environment the portfolio duration has to be reduced below 5 i.e. the portfolio duration must be less than the benchmark duration. This strategy will help in imposing constraints on the degree of variation of portfolio duration from that of the benchmark duration.