Suppose that new information regarding future inflation in Canada causes investors to become less risk averse. The SML approach indicates that, all else equal, firm cost of capital will increase.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) approach suggests that if investors become less risk-averse, the market's price of risk decreases, leading to a lower equity risk premium. This results in a lower cost of capital for firms, as the required return on investment decreases.

Suppose That New Information Regarding Future Inflation in Canada Causes