1According to the expectations theory of the term structure of interest rates,
A 
a longterm interest rate is equal to the average of current and expected future shortterm interest rates. 

B 
the yield curve is always flat. 

C 
a shortterm interest rate has no relation to longterm interest rates. 

D a shortterm interest rate is equal to the average of current and expected future longterm interest rates. 2The expectations theory of yield curves is not very realistic because

Ans:
1) Option A
a longterm interest rate is equal to the average of current and expected future shortterm interest rates.
As per expectations theory long term interest rates is equals to the market consensus expectation of future short term interest rates.Hence the forward rate is the average of current and expected future shortterm interest rates.
2) Option D
a key assumption is that investors are risk averse.
A risk averse investor is an investor who want lower returns but with known risks instead of higher returns and unknown risks.It is a key assumption in expectations theory of yield curves.
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