How 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 would lower the risk-free rate, reducing the y-axis intercept, while increased risk aversion would increase the market risk premium, steepening the slope of the SML.

How Would the Security Market Line Be Affected, Other Things