Other things held constant,if the expected inflation rate decreases and investors also become more risk averse,the Security Market Line would be affected as follows:
A) The y-axis intercept would decline,and the slope would increase.
B) The x-axis intercept would decline,and the slope would increase.
C) The y-axis intercept would increase,and the slope would decline.
D) The SML would be affected only if betas changed.
E) Both the y-axis intercept and the slope would increase,leading to higher required returns.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) represents the relationship between the expected return of a security and its beta (systematic risk). The y-axis intercept of the SML is the risk-free rate, which would decline if the expected inflation rate decreases. If investors become more risk averse, they would require a higher return for any given level of risk, leading to an increase in the slope of the SML.

Other Things Held Constant,if the Expected Inflation Rate Decreases and Investors