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Assume that the following relationship holds in the bond market:

(1+R(0,3))³=(1+R(0,1)+L1)(1+E[R(1,2)]+L2)(1+E[R(2,3)]+L3)

If investors are risk averse, which of the following is true?

All the risk premiums must be zero.

If investors are risk averse, they will not want to hold a risky risk bond

At least some risk premium L must be positive

Investors only care about risk and thus the risk premiums L can be any value, either positive or negetive

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92272910

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