If the price of money increases due to greater anticipated inflation, the risk-free rate will reflect this fact. Although rRF will increase, it is possible that the SML required rate of return for a stock will decrease because the market risk premium (rM - rRF) will decrease. (Assume that beta remains constant.)

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If the price of money increases due to greater anticipated inflation, both rRF and the market risk premium (rM - rRF) are likely to increase. Therefore, the SML required rate of return for a stock will also increase, assuming beta remains constant.

If the Price of Money Increases Due to Greater Anticipated