Mathematical formula calculating potential future interest rates. If the following equation is true: (1 + RLt) squared = (1 + RSt) ( 1 + RS*t+1), given RS is the 1-year interest rate, RL is the 2-year interest rate and the following year’s short term interest rate is predicted with RS*t+1, then an equal expected return occurs for 1- and 2-year investments.
What is EXPECTATIONS HYPOTHESIS?
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