Preferred Habitat Hypothesis

CFA General
#1

I’ve a question that I’m trying to solve and can’t square this circle…

According to the preferred habitat hypothesis when a portion of the yield curve has excess supply the risk premium for the portion is

A) Negative

B) Indeterminant

C) Neutral

D) Positive

Apparently it’s A. Can someone explain to me why this isn’t D? Surely excess supply --> higher yield than might otherwise be the case therefore risk premium is Positive?

#2

Yeah, it seems backwards. The question is not worded in a great way though. Probably it’s one of those things that you just take note of, but just move on.