Assume a 1-year investment horizon for a portfolio manager considering US Treasury market strategies. The manager is considering two strategies to capitalize on an expected rise in US Treasury security zero-coupon yield levels of 50 bps in the next 12 months:

1. A bullet portfolio fully invested in 5-year zero-coupon notes currently priced at 94.5392.

2. A barbell portfolio: 62.97% is invested in 2-year zero-coupon notes priced at 98.7816, and 37.03% is invested in 10-year zero-coupon bonds priced at 83.7906.

Further assumptions for evaluating these portfolios are shown here:

Solve for the expected return over the 1-year investment horizon for each portfolio using the step-by-step estimation approach in Equation 1.

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Statistic Investment horizon (years) Average bond price in portfolio (today) Average portfolio bond price (in 1 year/stable yield curve) Expected portfolio effective duration (in 1 year) Expected portfolio convexity (in 1 year) Expected change in US Treasury zero-coupon yields Bullet 1.0 94.5392 96.0503 3.98 17.82 0.50% Barbell 1.0 92.6437 94.3525 3.98 32.57 0.50%