A change in Federal Reserve monetary policy will
A) have no effect on the Security Market Line.
B) invert the Security Market Line.
C) change the slope of the Security Market Line.
D) cause a vertical shift of the Security Market Line.

Question

Quizplus · Accepted Answer

A change in Federal Reserve monetary policy can shift the overall market risk premium, causing a vertical shift of the Security Market Line. This is because changes in interest rates affect the required return for all investments, including stocks, and can lead to changes in investor expectations about future market returns. However, the slope of the Security Market Line is determined by the market's overall riskiness and is not directly affected by changes in Fed policy.

A Change in Federal Reserve Monetary Policy Will