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NOTE – on the exam, it is very likely for material on tactical asset allocation to be tested in conjunction with material from derivatives as tactical asset allocation can be accomplished by selling assets, or with a derivative overlay. Stuart should disagree with both of Swemba’s statements. Although Stuart’s goal of reducing the duration could be accomplished by selling bonds in the portfolio, doing so would likely incur significant transaction costs. Also, since the duration of each bond in the portfolio is likely different, specific bonds would have to be selected in order to accomplish Stuart’s goal, making the process more difficult. A derivative overlay, accomplished by using futures contracts, would be much easier and cost effective. Swemba is also incorrect with respect to the number of futures contracts that would need to be sold. The correct number of futures contracts to be sold is: (1.0)[(2.2 – 4.4) / 8.2]($12,000,000 / $102,000) = -31.56 ≈ -32 futures contracts. The minus sign means that 32 contracts should be sold to achieve the desired duration in the portfolio.