An increase in the expected future inflation rate has the effect of ____.
A) increasing the slope of the security market line
B) shifting the security market line upward by the amount of the expected increase in inflation
C) increasing systematic risk
D) None of these are correct

Question

Quizplus · Accepted Answer

An increase in the expected future inflation rate will increase the required rate of return for securities, which will result in a shift of the security market line upward by the amount of the expected increase in inflation. This is because investors will demand higher returns to compensate them for the expected loss in purchasing power caused by inflation. The slope of the security market line and systematic risk are not directly affected by changes in the expected future inflation rate.

An Increase in the Expected Future Inflation Rate Has the Effect