If one uses a long-term risk-free rate for the CAPM instead of a short-term risk-free rate, then one will generate a flatter security market line.

Question

Quizplus · Accepted Answer

This is because using a long-term risk-free rate will decrease the market risk premium, which is the difference between the expected return on the market and the risk-free rate. This will result in a lower slope for the security market line.

If One Uses a Long-Term Risk-Free Rate for the CAPM