Pub. 7 2016 Issue 3

www.wvbankers.org 14 West Virginia Banker Table 1 Reward to Risk One of the ways to determine if a bond is adequately boosting the performance of the portfolio is by assessing it’s “reward to risk.” By taking the bond’s book yield and dividing it by its effective duration, the investor is able to determine if the bond is adequately yielding given its price sensi- tivity. The goal for any bond (or portfolio) should be a 100% ratio (1:1). Below is a table of the best and worst performing sectors we saw in bank portfolios in Q2 of 2016. While an individual bond or trade may not materially change the reward to risk of an entire portfolio, each bond purchased or strat- egy implemented should be done with the goal of improving this yield / duration ratio. This type of ongoing scorecard is the best method to assess the investment decisions made over time and better position the portfolio in terms of yield and price sensitivity.  MFA — continued from page 13