Question: Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and exposure to changing interest rates. Give an example

Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and exposure to changing interest rates. Give an example of a portfolio that would accomplish this objective. Explain how the portfolio would be managed as time passes and interest rates change. Also explain why SPX’s proposal is not advisable for a conservative company like Madison.

RA manages several fixed-income portfolios. For simplicity, you decide to propose a mix of the following three portfolios:

• A portfolio of long-term Treasury bonds with an average duration of 14 years.

• A portfolio of Treasury notes with an average duration of 7 years.

• A portfolio of short-term Treasury bills and notes with an average duration of 1 year.

The term structure is flat, and the yield on all three portfolios is 5%.

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