^Refer^to^the^graph.^An^increaseⁱⁿ^the^Security^Market^Line^from^SML1 ^to^SML2 ^and^an^increaseⁱⁿ^the^average^expected^rate^of^return^of^asset^A^from^Y1 ^to^Y2 ^would^be^explained^by A)arbitrage only. B)a restrictive monetary policy only. C)both arbitrage and a restrictive monetary policy. D)neither arbitrage nor a restrictive monetary policy.

Question

Quizplus · Accepted Answer

The chart shows an increase in the Security Market Line (SML) from SML1 to SML2, as well as an increase in the expected rate of return of asset A. These changes can be explained by both arbitrage and a restrictive monetary policy. Arbitrageurs may take advantage of pricing discrepancies between different securities, which can lead to price corrections and an overall increase in the SML. A restrictive monetary policy can also increase the expected rate of return on assets by reducing the supply of money and increasing interest rates. Therefore, both arbitrage and a restrictive monetary policy can explain the changes shown in the graph.

Refer to the graph

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