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This might sound like a trivial question but would appreciate the answer. How would you calculate the return of the portfolio consisting of only equity and credit instruments? For example, consider only two assets S&P 500 and CDX IG and assume that they have equal weighting at 50%. In order to get daily portfolio returns we need daily returns for equity and credit. For equity it is simple (just daily price returns) but it is confusing how to do that for credit. I am assuming credit is quoted in spreads according to the convention. Would you just take a daily change in the credit spread and multiply that by spread duration? This wouldn’t be entirely correct as that’s not the only component of credit return but do you think it is a good approximation?

Thank you.

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  • $\begingroup$ Yes for credit, using the "risky" duration can convert a spread change to a price change. Excluding defaults & coupons if any. $\endgroup$
    – TickaJules
    Commented Nov 8, 2022 at 1:16
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    $\begingroup$ Please clarify your specific problem or provide additional details to highlight exactly what you need. As it's currently written, it's hard to tell exactly what you're asking. $\endgroup$
    – Community Bot
    Commented Nov 8, 2022 at 7:16

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Return on CDS alone doesn't make sense. \$ change in CDS position has 2 sources.

  1. 100bps accrual. This is a negative \$ impact.
  2. Duration*(change in spread). You can use 2nd order convexity as well to be a bit more precise.

Thanks,

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