Duration of a leveraged portfolio

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KeepOnTruckin

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Comes from the 2012 AM exam, question 7.A.i - when asked to calculate the duration of the leveraged portfolio, the answer is the duration of the equity. The equation is easy enough to remember but it’s knowing what they’re asking that can be the difference between getting it right and leaving easy points on the table. So, my question is - when they ask for the duration of the levered portfolio, they’re not asking the duration of the assets (the whole portfolio), but rather the duration of just the equity? Just seems like a strange way to word it…
 
I was also confused on this - in old mocks the Duration of the leveraged portfolio is given in general, they ask for duration of equity.
 
You own 200 million dollars of bond you have 300 million dollars of bond in your portfolio. It’s like leveraging Beta. You only investment is only 200, that’s why you use 200…
Sorry super tired right now, I will explain it better tmr if no one else is will elborate.
 
They are asking for exactly what it is. The duration of the levered portfolio
You do not “own” the assets that you have on leverage, your portfolio is your equity. Therefore, the duration of your holdings is only based off of what you truly own. So you’ve taken additional risk by leveraging, therefore the duration is much higher because you’re essentially doubling down.
 
I guess that the viewpoint is that you couldn’t care less about how the duration affects someone else’s assets; you only care about how it affects your own. Take the selfish view and calculate it for your equity.
 
Ha…the selfish view. Ok got it-so “your portfolio” is really considered to be just the equity, not including the borrowed portion-thanks guys!
 
They had at least two similar questions like that in the schweser practice exams too… I bombed it everytime by thinking the leveraged porfolio is referring to the invested asset…
 
Anyone else confuse that this question was for asking for the duration of the assets, not of the equity? Its a simple calculation, but its tough to determine if the “portfolio” refers to the assets or to the equity. I’ll take S2000’s adivce from last year if it happens to pop up on this year’s exam.
 
why would they care only about the duration of the asset?
It’s like trying to measure a company’s net worth through their assets without accounting for the liabilities.
 
why would they care only about the duration of the asset?
It’s like trying to measure a company’s net worth through their assets without accounting for the liabilities.
 
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