Charlie is keen to implement an investment strategy to outperform a bond index. Maturity and allocation...

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Charlie is keen to implement an investment strategy to outperform a bond index. Maturity and allocation details for the government bond index are provided below: Maturity 1-3 years 3-7 years 7-10 years allocation 40% 30% 30% Charlie has forecasted that the economy will heat up and central banks will increase interest rates to stimulate the economy. He further expects the short term yields to increase by 25 basis points when RBA meets next month. However, he is unsure what will happen to economy in future. Current yields for the mid-points for each group of maturities are: Maturity 2 8.5 1% 3% Yields Required: a) You will help create a forecasted scenario for the Australian economy based on the expectations of a rate rise next month. You will provide a forecast for the yields at 2 years, 5 years and 8.5 years by adjusting the current yields for each of these maturities. Please make sure you provide a short commentary of why you expect the yields to change to what you have forecasted. b) Create an investment strategy by only adjusting the allocations of the bond index. You must prove that IF the yields change as per your forecast, your investment strategy will outperform the bond index. You can assume that all bonds are zero coupon bonds and that bonds only exist for maturities of 2, 5 and 8.5 years only. 6% Charlie is keen to implement an investment strategy to outperform a bond index. Maturity and allocation details for the government bond index are provided below: Maturity 1-3 years 3-7 years 7-10 years allocation 40% 30% 30% Charlie has forecasted that the economy will heat up and central banks will increase interest rates to stimulate the economy. He further expects the short term yields to increase by 25 basis points when RBA meets next month. However, he is unsure what will happen to economy in future. Current yields for the mid-points for each group of maturities are: Maturity 2 8.5 1% 3% Yields Required: a) You will help create a forecasted scenario for the Australian economy based on the expectations of a rate rise next month. You will provide a forecast for the yields at 2 years, 5 years and 8.5 years by adjusting the current yields for each of these maturities. Please make sure you provide a short commentary of why you expect the yields to change to what you have forecasted. b) Create an investment strategy by only adjusting the allocations of the bond index. You must prove that IF the yields change as per your forecast, your investment strategy will outperform the bond index. You can assume that all bonds are zero coupon bonds and that bonds only exist for maturities of 2, 5 and 8.5 years only. 6%

Answer rating: 100% (QA)

a Forecasted scenario for the Australian economy based on the expectations of a rate rise next month ... View the full answer