Under the Liquidity Premium Theory,the Shape of the Yield Curve

question 70

Multiple Choice

Under the liquidity premium theory,the shape of the yield curve depends on

• A) the relative return of investments in common stocks versus investments in corporate bonds.
• B) the size of the federal government's budget deficit.
• C) government tax treatment of long-term versus short-term bonds.
• D) the expected pattern of future short-term rates and the size of the term premium at each maturity.

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Definitions:

Markowitz

Refers to Harry Markowitz, an economist known for his pioneering work in modern portfolio theory and investment diversification.

Systematic Risk

The type of risk inherent to the entire market or an entire market segment, also known as market risk, which cannot be eliminated through diversification.

Diversification

An investment strategy that spreads exposure across various assets to reduce risk.

Unsystematic Risk

The risk associated with an individual asset or firm, which can be mitigated through diversification.