For an institutional investor,if the expectations theory is correct,the average of the expected short-term interest rates over the life of the long-term investment should be roughly equal to the interest rate on the long term investment,which would
A) result in a positive level of profits from an interest-carry-trade strategy.
B) result in an even higher-than-expected level of profits from an interest-carry-trade strategy.
C) result in a high level of negative profits (losses) from an interest-carry-trade strategy.
D) eliminate any potential profits from an interest-carry-trade strategy.

Question

Quizplus · Accepted Answer

If the expectations theory is correct and the average of the expected short-term interest rates over the life of the long-term investment is equal to the interest rate on the long-term investment, there would be no opportunity for the investor to make a profit from an interest-carry-trade strategy. This is because the interest rate differential between the short-term and long-term investments would be zero, eliminating any potential profits. Therefore, the answer is D - eliminating any potential profits from an interest-carry-trade strategy.

For an Institutional Investor,if the Expectations Theory Is Correct,the Average