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Assume that the following relationship holds in the bond market: (1+R(0,3))=(1+R(0,1)+L)(1+E[R(1,2)]+L)(1+E[R(2,3)]+L) If investors are risk neutral, can you think of a way that could make
Assume that the following relationship holds in the bond market:
(1+R(0,3))=(1+R(0,1)+L)(1+E[R(1,2)]+L)(1+E[R(2,3)]+L)
If investors are risk neutral, can you think of a way that could make this relationship valid?
All the risk premiums L should be positive
All the risk premiums L should bezero
Investors are indifferent to risk so premiums L can take any value.
Investors are indifferent to risk soit is not possible for this relationship to hold under any circumstance.
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