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billyx524
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Posts: 32
Joined: February 12th, 2016, 4:48 pm

Interview Question

September 4th, 2019, 1:40 am

Hello,

Can someone please help me with the following question.

Suppose we hold some stocks, and we want to add some treasuries in our portfolio.  Would it be better to add very long duration treasuries or a levered position in short duration treasuries?

Thanks
 
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DavidJN
Posts: 1728
Joined: July 14th, 2002, 3:00 am

Re: Interview Question

September 4th, 2019, 1:52 pm

I’ve seen this question before and thought it insufficiently phrased. Apart from not knowing the investment purpose and the investment horizon (a pension plan might logically operate differently than a bank trading desk), what is the regulatory capital treatment of the asker? The question is likely about capital efficiency and liquidity, rather than the boring age-old debate as to whether equities have durations.
 
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bearish
Posts: 4892
Joined: February 3rd, 2011, 2:19 pm

Re: Interview Question

September 7th, 2019, 6:39 pm

If I were to ask this question, it would  be to gauge the candidate's ability to deal with an ill-posed question and see whether they seek more information in a reasonable fashion or rush to provide some unsupportable conclusion. I don't like this question, but in that spirit I have been known to occasionally ask candidates what's riskier: a three month treasury bill or a 30 year treasury bond? I was once interviewed by the legendary Pete Mueller, and his first question to me was how much cash was in his pockets. Very annoying questions, but sometimes they can tease out some useful information. Seems to have worked in his case...

Going back to the original question, it is entirely unclear to me that you can obtain sufficiently cheap financing to make a net positive return by leveraging short duration treasuries.
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