Flander evaluates a new bullet portfolio and a new barbell portfolio, each with a 12-month time horizon, using zero-coupon notes issued by the Australian government. Flander projects that over the next 12 months, the Australian zero-coupon yield curve will experience a downward parallel shift of 60 bps. The Australian dollar is projected to remain stable relative to the US dollar. Exhibit 3 presents the data for the two portfolios.

1. Exhibit 3: Selected Data for Australian Bullet and Barbell Portfolios

Calculate the total expected return for the bullet and barbell portfolios presented in Exhibit 3. Show your calculations. Identify the component factor that contributes most of the outperformance of the higher-performing portfolio.

Template for Question 32

Calculate the total expected return for the bullet and barbell portfolios presented in Exhibit 3. Show your calculations.

Identify the component factor that contributes most of the outperformance of the higher-performing portfolio.

Open table as spreadsheet

	Bullet	Barbell
Investment horizon (years)	1.0	1.0
Average bond price for portfolio currently	98.00	98.00
Average bond price for portfolio in one year (assuming stable yield curve)	99.75	100.00
Expected effective duration for portfolio (at the horizon)	3.95	3.95
Expected convexity for portfolio (at the horizon)	19.50	34.00
Expected change in government bond yield curve	0.60%	0.60%