Which of the following are possible explanations for the term structure of interest rates?
A) The expectations theory
B) The liquidity preference theory
C) Modern portfolio theory
D) The expectations theory and the liquidity preference theory

Question

Quizplus · Accepted Answer

The term structure of interest rates can be explained by both the expectations theory and the liquidity preference theory. The expectations theory suggests that long-term interest rates reflect expected future short-term rates, while the liquidity preference theory adds that investors demand a premium for holding longer-term securities, due to their greater risk. Modern portfolio theory, on the other hand, is more focused on the diversification of investments to optimize returns, rather than explaining interest rate structures.

Which of the Following Are Possible Explanations for the Term