What Does a Downward-Sloping Yield Curve Imply, According to the Expectations

question 26

Multiple Choice

What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

• A)Investors expect long-term interest rates to rise in the future.
• B)Investors expect future short-term interest rates to be lower than the current short-term interest rate.
• C)Investors expect future short-term interest rates to be the same as the current short-term interest rate.
• D)Investors expect future short-term interest rates to be higher than the current short-term interest rate.

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Definitions:

Cumulative Normal Function

A statistical function that indicates the probability that a random observation that is drawn from a normal distribution falls within a certain range of values.

Sharpe Measure

A ratio used to evaluate the risk-adjusted return of an investment portfolio; it represents the excess return per unit of deviation in an investment.

Risk Adjusted Performance

An evaluation of an investment's return after accounting for the degree of risk that was taken to achieve it.

Portfolio

An assortment of financial assets including stocks, bonds, and commodities, as well as cash and near-cash items like mutual funds and ETFs.