Suppose the interest rates on$1-,5-,$ and$10-$year Canada bonds are currently

$44\%,$

$77\%,$

and

$77\%,$

respectively. Investor A

chooses to hold only $1$ dash year bondschooses$$to$$hold$$only$1-$year$$bonds$,$

and Investor B

is indifferent between holding $5$ dash and $10$ dash year bondsis$$indifferent$$between$$holding$5-$and$10-$year$$bonds$.$

Which of the following statements could explain the behaviour of Investor

Upper AA$?$

$($Unless otherwise$$ stated, assume that the interest rate on each bond is equal to the average of$1-$year interest rates that Investor

Upper AA

expects will occur over the life of the$$ bond.$)($Select all that$$ apply.$)$

A$.$

The liquidity premium that Investor

Upper AA

would require in order to choose a bond with maturity of $5$ years or more is less than

$33\%$

above that for a$1-$year bond.

B$.$

Investor

Upper AA

is very$$ risk$-$averse and therefore strongly prefers assets with less$$ interest$-$rate risk, even when expected returns on other assets are higher.

C$.$

Investor

Upper AA

expects average$1-$year interest rates over the next $5$ and $10$ years to be greater than

$77\%$

and$($holding everything else$$ equal$)$ does not have strong preferences for bonds of one maturity over bonds of another.

D$.$

Investor

Upper AA

is$$ risk$-$neutral and therefore prefers assets with the greatest expected$$ return, even when$$ interest$-$rate risk on other assets is lower.

E$.$

Investor

Upper AA

expects average$1-$year interest rates over the next $5$ and $10$ years to be less than

$77\%$

and$($holding everything else$$ equal$)$ does not have strong preferences for bonds of one maturity over bonds of another.

F$.$

The liquidity premium that Investor

Upper AA

would require in order to choose a bond with maturity of $5$ years or more is more than

$33\%$

above that for a$1-$year bond.