for q27, why i feel preferred habitat theory is the answer? below is the question: “Different portfolio stratgies within a specif government bond market and over the same time horizon will have the same return assuming forward interest rates are realized” it says over the same time horizon, so I feel preferred habitat theory is correct… thanks.
does the answer they give make sense? Think expectations—> forward rates must be what I expect
“preferred habitat theory asserts that investors demand a liquidity premium for extending maturity so that the forward rates are biased by this premium. Investors must be induced by a yield premium in order to accept the risks associated with shifting funds out of their PREFERRED sector and forward rates embody the premium for this inducement” pg 271 #15 answer.