Portfolio Management interview preparation

Questions

100

Traced to a firm

40

Firms

24

Updated

September 2026

Asked at

All firmsBLBlackRock4Vanguard4WMWellington Management4Amundi3ACAQR Capital Management3Neuberger Berman3SCSchroders3Man Group2MSCI2Northern Trust2AllianceBernstein1Apollo Global Management1Blackstone1BMBNY Mellon1Carlyle Group1Fidelity Investments1Goldman Sachs1Invesco1Millennium Management1MSMorgan Stanley1NUNuveen1PIMCO1SSState Street1TPTPG1

Topic

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

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseMarket viewFitBrainteaser

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.

2. 055What is liability-driven investment, and why do pension schemes do it?Fixed income and LDIIntermediatetechnicalPension and endowment investingFixed income

   Say this

   LDI defines risk as the mismatch between assets and liabilities rather than as asset volatility, and builds the portfolio to hedge the liability's sensitivity to rates and inflation. Schemes do it because the liability is a long, inflation-linked bond, so an unhedged scheme is running a huge implicit rates position.

   Then walk it

   1. Start with the liability. Pension promises are a stream of payments stretching decades out, often indexed, discounted at a market rate. So liability value has a duration of maybe 15 to 25 years and significant inflation sensitivity.
   2. That means a scheme holding equities and short bonds is short a long-duration inflation-linked bond. A 100 basis point fall in real yields can add 20 percent to the liability value while the assets barely move, and the deficit widens even though nothing went wrong with the investments.
   3. So LDI matches the sensitivities: hold long-dated and index-linked government bonds, and top up the hedge synthetically with interest rate and inflation swaps, or with repo on gilts, so you can achieve the required duration without putting all the capital in bonds.
   4. That capital efficiency is the point and also the danger. Leverage via repo and swaps means collateral calls when yields rise. The UK in September 2022 is the case study: yields spiked, schemes faced collateral calls, gilts were sold to meet them, which pushed yields higher again. A hedging programme became a forced-selling spiral.
   5. So the design questions are the hedge ratio, usually set as a percentage of liability duration hedged and often stepped up as funding improves, the collateral waterfall, and how much liquid headroom sits behind the leverage. After 2022 schemes hold far more collateral buffer.
   6. The honest tension: hedging locks in the funding position, so a scheme that hedges fully gives up the chance of closing a deficit through market returns. That is why the hedge ratio is a governance decision about deficit tolerance, not a purely technical one.

   Where candidates lose it

   Describing LDI as 'buying long bonds'. The mechanism that matters is hedging the liability's rate and inflation sensitivity, usually synthetically with leverage, and the risk that matters is collateral. If you cannot explain the September 2022 gilt episode, you do not understand LDI as it is actually practised.

   Expect next

   • What happened to UK schemes in September 2022?
   • How would you set the hedge ratio?
   • What collateral buffer would you hold?
3. 056How would you actually match a liability stream with a bond portfolio?Fixed income and LDIHardsuperdayFixed incomePension and endowment investing

   Say this

   Three approaches, increasingly approximate. Cash flow matching buys bonds whose coupons and maturities fund each payment, which removes reinvestment risk entirely. Immunisation matches duration and present value. Duration matching on a single number is the crudest, and it only works for parallel curve shifts.

   Then walk it

   1. Cash flow matching, sometimes called dedication: build a ladder so each year's payments are met by maturing principal and coupons. It is the cleanest hedge and needs no rebalancing, but it needs bonds at every maturity, which does not exist beyond 30 years in most markets, and it is expensive.
   2. Immunisation: match present value and duration, and make sure asset convexity is at least as high as liability convexity. Then a small parallel shift leaves the surplus unchanged. It needs rebalancing because durations drift at different speeds as time passes and yields move.
   3. The gap between them is the curve. A liability with 18 years of duration can be matched by a bullet at 18 years or a barbell of 5s and 30s. Same duration, very different behaviour if the curve steepens, so I would match key-rate durations at several points rather than one summary number.
   4. Then the parts you cannot match with bonds. Longevity risk, inflation beyond the index-linked market's capacity, and any real return requirement if the scheme is in deficit. That residual is what the return-seeking portfolio and, increasingly, a longevity swap or buy-in exists to cover.
   5. Practically, most schemes do it synthetically: physical bonds for the core, plus swaps or gilt repo to extend duration to 20 or 25 years without tying up all the capital, which leaves assets free for the growth portfolio.
   6. And then the operational governance: a collateral schedule, eligible collateral, a liquidity waterfall, and a stress test asking what a 150 basis point yield rise does to collateral calls over a week. That is the part that failed in 2022, and I would present it as part of the matching design rather than an afterthought.

   Where candidates lose it

   Saying 'match the duration' and stopping. Duration matching only immunises against a parallel shift, and real liabilities are exposed to the shape of the curve, so key-rate duration matching is the expected refinement. Also name what bonds cannot hedge, longevity and the deficit, because a candidate who thinks the liability can be fully hedged has not met a real scheme.

   Expect next

   • Why does convexity need to be at least as high on the asset side?
   • How do you hedge inflation beyond the linker market's capacity?
   • What would a 150 basis point yield rise do to your collateral?
4. 057What is convexity, and why does a duration-matched portfolio still carry risk?Fixed income and LDIIntermediatetechnicalFixed incomeMulti-asset

   Say this

   Convexity is the curvature of the price-yield relationship, the second-order term. Duration alone understates the gain when yields fall and overstates the loss when they rise. A duration match still carries risk because duration is local and linear, and because the curve does not move in parallel.

   Then walk it

   1. The price change is approximately minus duration times the yield change plus half the convexity times the yield change squared. For a 25 basis point move the second term is negligible; for 200 basis points it is material and it works in your favour on a long bond.
   2. Positive convexity is a good thing you pay for through a lower yield. Low coupon, long maturity bonds have the most, which is why a 30 year zero is the most convex instrument in the government curve.
   3. Negative convexity is the interesting case. Callable bonds and mortgage-backed securities lose duration as yields fall, because the borrower refinances, so you get less of the rally and all of the sell-off. Holders are compensated with extra spread, and in 2022 that compensation turned out to be inadequate.
   4. Risk one after a duration match: the second-order term. If liability convexity exceeds asset convexity, a large move in either direction widens the deficit. So immunisation requires matching convexity as well, or at least holding more of it than the liability.
   5. Risk two, curve shape. Duration assumes a parallel shift. A barbell and a bullet with equal duration diverge when the curve steepens or flattens, which is why key-rate durations matter.
   6. Risk three, the things duration does not see at all: spread risk if you used credit rather than governments, inflation basis if the liability is indexed and the assets are nominal, and the drift in both durations as time passes, which forces periodic rebalancing.

   Where candidates lose it

   Defining convexity as a formula without saying who is short it and why. The sharp answer names negative convexity in callables and mortgages, and it says that a duration match still leaves convexity, curve shape and spread risk. Saying convexity is 'always good' is wrong: you pay for it in yield.

   Expect next

   • Who is naturally short convexity?
   • How would you hedge curve risk rather than level risk?
   • Why did mortgage portfolios suffer in 2022?

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.