If investors become more averse to risk, the slope of the Security Market Line (SML) will increase.

Question

Quizplus · Accepted Answer

When investors become more averse to risk, they require a higher return for the same level of risk. This results in an increase in the market risk premium (the difference between the expected return on the overall market and the risk-free rate), which in turn increases the slope of the Security Market Line (SML).

If Investors Become More Averse to Risk, the Slope of the Security