would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse?
A) The x-axis intercept would decline, and the slope would increase.
B) The y-axis intercept would increase, and the slope would decline.
C) The SML would be affected only if betas changed.
D) Both the y-axis intercept and the slope would increase, leading to higher required returns.
E) The y-axis intercept would decline, and the slope would increase.

Question

Quizplus · Accepted Answer

A decrease in expected inflation rate would lead to a decrease in the required return for all investments, causing the SML to shift downward and the y-axis intercept to decline. An increase in investors' risk aversion would cause the slope of the SML to increase, reflecting the higher return required for a given level of risk. Therefore, the y-axis intercept would decline, and the slope would increase.

Would the Security Market Line Be Affected, Other Things Held