Regarding the effects of interest rate shift on fixed-income portfolios with similar durations，which of the following statements is not wrong?

 

　　A.     A barbell portfolio has greater convexity than a bullet portfolio because convexity increases linearly with maturity.

 

　　B.     A barbell portfolio has greater convexity than a bullet portfolio because convexity increases with the square of maturity.

 

　　C.     A barbell portfolio has lower convexity than a bullet portfolio because convexity increases with the square of maturity.

 

　　D.     A barbell portfolio has lower convexity than a bullet portfolio because convexity increases linearly with maturity.

 

　　Answer: B

 

　　The statement compares two portfolios with the same duration. A barbell portfolio consists of a combination of short-term and long-term bonds. A bullet portfolio has only medium-term bonds. Because convexity is a quadratic function of time to wait for the payments, the long-term bonds create a large contribution to the convexity of the barbell portfolio, which must be higher than that of the bullet portfolio.