Given the information on the composition of a bond index in the table:

a. Explain how you would construct a bond index portfolio using duration/

sector and duration/quality sector approaches.

b. Define enhanced bond indexing.

c. How would you apply enhanced bond indexing to your bond index portfolio if you expected a slow economy to improve and grow in the near future?

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Sector Percentage of Value Duration Treasury 30% 4.50 Federal agency 5% 3.25 Municipals 10% 5.25 Corporate Sovereign 35% 6.25 10% 5.75 Asset-backed 10% 6.25 100% Quality Sector Percentage of Value Duration AAA 40% 5.25 AA 25% 5.35 A 20% 5.25 BBB 5% 5.65 BB 5% 5.25 B 5% 5.30 100%