A decrease in investors' risk aversion causes the slope of the SML to decline becoming more horizontal.

Question

Quizplus · Accepted Answer

When investors' risk aversion decreases, they become more willing to take on risk, which leads to a higher demand for risky investments and a lower demand for safe investments. This causes the expected return for risky investments to decrease relative to the risk-free rate, which in turn causes the slope of the Security Market Line (SML) to decline and become more horizontal.

A Decrease in Investors' Risk Aversion Causes the Slope of the SML