This question-specific review guide is tied to the answer reasoning for a PracticeTestVault item. Use it after you answer the question so the review stays focused on what the prompt actually tested.
What this question is testing
Objective: Fixed-income portfolio management
Prompt focus: A bond portfolio manager wants to immunize a single future liability. To do so, the manager should construct a portfolio whose:
Why the correct answer works
Macaulay duration equals the investment horizon of the liability
Correct. Immunizing a single liability requires setting the portfolio Macaulay duration equal to the liability horizon.
Why the tempting wrong answer fails
The tempting wrong answer usually loses because it skips the key condition, priority, or evidence in the prompt.
Plain-language takeaway
Classical immunization of a single liability requires matching the portfolio's Macaulay duration to the liability's horizon and ensuring the present value of assets equals the present value of the liability. This balances price and reinvestment risk.
Simple analogy
Think of fixed-income portfolio management like following a short checklist: identify the clue, confirm the rule, and then make the move that fits this exact scenario.
How to review it before a retake
- Underline the command word and name what the question is asking before rereading the choices.
- Compare the correct answer against the closest distractor and write the exact detail that separates them.
- Retest this objective with a fresh question without looking at the rationale first.