If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase. If there is no change in investors' risk aversion, then the market risk premium (rM - rRF) will remain constant. Also, if there is no change in stocks' betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

Question

Quizplus · Accepted Answer

This statement is true as per the CAPM formula, the required rate of return on each stock will increase by the same amount as the increase in expected inflation, assuming no change in investors' risk aversion and stocks' betas. The market risk premium remains constant in this scenario.

If the Price of Money (E