The Unbiased Expectations Hypothesis argues that:
A) There is a direct positive relationship between the nominal rate of interest on bonds and the expected rate of inflation
B) Expected future short term rates of return should be such that a long term asset held over n periods yields the same return as a short term asset that is held, sold, and reinvested over n periods.
C) Expectations over the value of inflation lowers the return on common stocks and real assets in all possible situations
D) The real rate of return on bonds is determined by the total demand for and the expected supply of money
E) None of the above

Question

Quizplus · Accepted Answer

The Unbiased Expectations Hypothesis posits that the yield on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond. This means investors expect to receive the same returns from investing in a series of short-term bonds as they would from investing in a long-term bond, assuming they reinvest at the end of each term.

The Unbiased Expectations Hypothesis Argues That