Portfolio Management interview preparation

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100

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24

Updated

September 2026

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Topic

All topicsPortfolio theory5Factor models8Asset allocation11Rebalancing3Portfolio construction7Benchmarks and tracking error5Performance measurement8Risk management6Fixed income and LDI5Currency and global3Implementation and costs5Active versus passive6India markets7Brainteasers5Career and fit16

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1. 054What is duration, and what is effective duration?Fixed income and LDIIntermediatetechnicalAmundiRates · London · 2018

   Say this

   Macaulay duration is the weighted average time to receive the cash flows. Modified duration converts that into a price sensitivity, roughly the percentage price change for a 1 percent yield move. Effective duration is the empirical version for bonds whose cash flows change with rates, so it is the only one that works for callables, mortgages and anything with an option.

   Then walk it

   1. Modified duration equals Macaulay divided by one plus the yield per period. A modified duration of 7 means about a 7 percent price fall for a 100 basis point rise in yield, before convexity.
   2. Effective duration, sometimes called option-adjusted duration, is computed numerically: shift the whole yield curve up and down by a small amount, revalue the bond with its options repriced, and take the price difference over twice the shift.
   3. Why you need it: a callable bond's cash flows are not fixed. When yields fall, the issuer calls, so the bond does not rally as a straight bond would. Its effective duration shortens as yields fall, which is negative convexity.
   4. Mortgage-backed securities are the extreme case. Prepayments accelerate when rates fall and slow when rates rise, so effective duration extends exactly when you do not want it to. That extension risk is what made MBS books painful in 2022.
   5. Portfolio duration is the market-value weighted average of the components' durations, which is how you manage a book to a target. But a single duration number assumes a parallel shift, so I would hold key-rate durations alongside it to see curve exposure, because a barbell and a bullet with the same duration behave differently when the curve twists.
   6. The practical limitation: duration is a first-order local approximation. For a 25 basis point move it is fine, for 200 basis points you need the convexity term as well, and for anything with embedded optionality the full revaluation is the only honest answer.

   Where candidates lose it

   Defining duration as 'the time to maturity' or conflating Macaulay and modified. And if you are asked for effective duration specifically, the interviewer is testing whether you know that cash flows can change with rates. Mention callables or mortgages and negative convexity, or the answer is incomplete.

   Expect next

   • What is negative convexity and who has it?
   • Why is a single duration number not enough?
   • What is the duration of a floating rate note?

   Reported by candidates at Amundi (Rates, London, 2018). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.