An investor is faced with an active portfolio decision across three bond rating categories based on the following current market information:Which active bond portfolio maximizes expected excess return under a stable credit market assumption versus an equally weighted benchmark portfolio across the three rating categories?

A. 50% A rated bonds, 50% BBB rated bonds

B. 50% BBB rated bonds, 50% BB rated bonds

C. 50% A rated bonds, 50% B rated bonds

Transcribed Image Text:

Rating Category A BBB BB Current OAS 1.00% 1.75% 2.75% Expected Loss (POD X LGD) 0.10% 0.75% 2.50% EffSpreadDur 7 6 5