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How to understand Portfolio Duration?

幫考網(wǎng)校2020-10-12 15:26:07
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Portfolio duration is a measure of the sensitivity of a portfolio's value to changes in interest rates. It is calculated as the weighted average of the durations of the individual securities in the portfolio, where the weights are the percentage of the portfolio invested in each security.

Duration measures the time it takes for the portfolio to receive the present value of its expected cash flows. A higher duration means that the portfolio is more sensitive to changes in interest rates, while a lower duration means that the portfolio is less sensitive to interest rate changes.

For example, if a portfolio has a duration of 5 years, it means that a 1% increase in interest rates would lead to a 5% decrease in the value of the portfolio. On the other hand, if the duration is 2 years, a 1% increase in interest rates would lead to a 2% decrease in the value of the portfolio.

Understanding portfolio duration is important for investors who want to manage their interest rate risk. By adjusting the duration of their portfolio, investors can reduce their exposure to interest rate fluctuations and potentially improve their overall returns.
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