21-Bond Portfolio Man Page 656 Wednesday, February 4, 2004 1:12 PM
656 The Mathematics of Financial Modeling and Investment ManagementEXHIBIT 21.2 (Continued)# Issuer Name Coup Maturity Moody S&P Sect Par Val %
35 PUB SVC ELECTRIC + GAS 6.125 08/01/02 A3 A− ELU 3,000 0.47
36 RAYTHEON CO 7.200 08/15/27 Baa1 BBB IND 8,000 1.31
37 RESOLUTION FUNDING CORP 8.125 10/15/19 Aaa+ AAA+ USA 17,000 3.51
38 TIME WARNER ENT 8.375 03/15/23 Baa2 BBB− IND 5,000 0.90
39 ULTRAMAR DIAMOND SHAM 7.200 10/15/17 Baa2 BBB IND 4,000 0.63
40 US TREASURY BONDS 10.375 11/15/12 Aaa+ AAA+ UST 10,000 2.17
41 US TREASURY BONDS 10.625 08/15/15 Aaa+ AAA+ UST 14,000 3.43
42 US TREASURY BONDS 6.250 08/15/23 Aaa+ AAA+ UST 30,000 5.14
43 US TREASURY NOTES 8.875 02/15/99 Aaa+ AAA+ UST 9,000 1.38
44 US TREASURY NOTES 6.375 07/15/99 Aaa+ AAA+ UST 4,000 0.61
45 US TREASURY NOTES 7.125 09/30/99 Aaa+ AAA+ UST 17,000 2.59
46 US TREASURY NOTES 5.875 11/15/99 Aaa+ AAA+ UST 17,000 2.62
47 US TREASURY NOTES 6.875 03/31/00 Aaa+ AAA+ UST 8,000 1.23
48 US TREASURY NOTES 6.000 08/15/00 Aaa+ AAA+ UST 11,000 1.70
49 US TREASURY NOTES 8.000 05/15/01 Aaa+ AAA+ UST 9,000 1.50
50 US TREASURY NOTES 7.500 11/15/01 Aaa+ AAA+ UST 10,000 1.67
51 US TREASURY NOTES 6.625 03/31/02 Aaa+ AAA+ UST 6,000 0.96
52 US TREASURY NOTES 6.250 08/31/02 Aaa+ AAA+ UST 10,000 1.60
53 US TREASURY NOTES 5.750 08/15/03 Aaa+ AAA+ UST 1,000 0.16
54 US TREASURY NOTES 6.500 05/15/05 Aaa+ AAA+ UST 1,000 0.17
55 US TREASURY NOTES 6.125 08/15/07 Aaa+ AAA+ UST 1,000 0.17
56 WELLS FARGO + CO 6.875 04/01/06 A2 A− FIN 5,000 0.80
57 WESTPAC BANKING CORP 7.875 10/15/02 A1 A+ FOC 3,000 0.49Source: Exhibit 9 in Lev Dynkin, Jay Hyman, and Wei Wu, “Multi-Factor Risk
Models and Their Applications,” in Frank J. Fabozzi (ed.) Professional Perspec-
tives on Fixed Income Portfolio Management: Volume 2 (New Hope, PA: Frank J.
Fabozzi Associates, 2001).Systematic Risk Exposure
The estimated total tracking error is 52 basis points per year. Exhibit 21.3
provides a summary of the tracking error breakdown for the 57-bond port-
folio. As described earlier, the systematic risk factors are broken into two
parts: term structure factors and nonterm structure factors. From the first
column of Exhibit 21.3 it can be seen that the three major systematic risk
exposures are (1) term structure factors (i.e., exposure to changes in the
term structure); (2) sector factors (i.e., changes in credit spreads of sectors);
and (3) quality factors (i.e., changes in credit spreads by quality rating).
The subcomponents of the tracking error breakdown reported in
Exhibit 21.3 are shown in two different ways, labeled “Isolated” and
“Cumulative.” In the “Isolated” column, the tracking error due to the
effect of each subcomponent is considered in isolation. What is not con-