Refer to the graph. An increase in investor concern about risk would be shown by
A) an increase in the intercept.
B) a shift from line C to line B.
C) a shift from line A to line B.
D) a decrease in the risk-free interest rate.

Question

Refer to the graph. An increase in investor concern about risk would be shown by
A) an increase in the intercept. 
B) a shift from line C to line B. 
C) a shift from line A to line B. 
D) a decrease in the risk-free interest rate.

Quizplus · Accepted Answer

A shift from line A to line B shows an increase in the market risk premium, which indicates that investors are demanding a higher return to compensate for the increased risk. This shift would not be caused by an increase in the intercept or a decrease in the risk-free interest rate. Shifting from line C to line B would indicate a decrease in the market risk premium, which is the opposite of what the question is asking about.

Refer to the Graph