Explain Expectation Theory in terms of long term interest rates. “Explanation: – The present and future long-term interest rate is the (standard or arithmetic) average of each of the future long-term rates and the prospective one-period or future short-term rates during the long-run period.
The term “anticipated future rates” is used to describe the expected future rates of future returns from any given investment, whether they are market-linked or not. This includes future returns that are based on interest rates, the economy, inflation, and many other factors. There are several different forms of expected future rates of return. For example, there are expected return rates of 10 year treasury bonds that have been set at different levels based on historical data; there are expected return rates of ten year treasury bills that have been set at different levels based on historical data; there are expected return rates of ten year treasury mutual funds that have been set at different levels based on historical data; there are expected return rates of long term notes that are based on historical data; there are expected return rates of ten year treasury warrants that are based on historical data; and there are expected return rates of twenty-year treasury bonds that have been set at different levels based on historical data.
Expected future cash flows can be used to predict the future behavior of financial markets, particularly where long term risk/reward and short term risk/reward are involved. In particular, this is often used to help explain the rise and fall of market and financial indices, such as the Dow Jones Index, and how changes in these indices can impact the behavior of markets in general. and the behavior of individual stocks and financial markets in particular. For instance, if the Dow Jones Index rises and falls by a certain amount, investors may expect a rise and fall in the market value of their portfolios, especially if the index is highly correlated with other similar indexes.
There are two types of models that attempt to describe the behavior of an index. One is called the moving average model and another is called the steeper slope model. In the moving average model, an index is compared over time to the average over time, while in the steeper slope model an index is compared against its lowest point and the subsequent highest point. In both cases, the model assumes that the market will continue to move forward at a constant rate over time.
In recent years, the “Greenspan’s rule” is often referred to as the assumption that the higher the expected return of an investment, the lower the market will move. There are also assumptions that an investment will always grow and that the amount of risk that an investor is willing to tolerate, or take, is proportional to the potential returns. With some exceptions, the expectation theory is generally considered to be sound. For example, the expectation theory is often used to explain the historical relationship between an index’s high and low points, where a rise or fall in a stock price signals a market that is about to increase or decrease, but not move upward.
Expectation theories are also commonly used in forecasting the behavior of the real estate market. These include the real estate cycle theory, which predicts a consistent pattern of increases and decreases in prices and yields over a three-year period. Also, the business cycle theory is used in forecasting the behavior of the stock market, predicting patterns of volatility in stock prices over short periods of time, such as one month.
The theory of expectations is used in many fields of study. It has been used to explain the behavior of stocks in relation to economic factors and other external factors. As one of the major assumptions in forecasting and analyzing stock market behavior, the theory of expectations has been used to explain the relationship between past and present trends and future movements in prices in the stock market. It has also been used to explain the patterns in the behavior of various types of investments, especially in the real estate market. Because the theory of expectations is based on statistical evidence and mathematical procedures, it can be used in many different types of analysis.
