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Important Factors for Expectation Theory
The following circumstances are essential for the expectation theory to hold.
i) Ideal capital markets exists where there are many sellers and buyers of security along with none having a important influence on the interest rates.
ii) Investors have homogeneous expectations for future interest rates and returns upon all investments.
iii) Investors are rational wealth maximizes
iv) Bankruptcy of firms because of use of borrowing is unlikely.
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