Which of the following statements about the risk-return relationship observed in investing is correct?
A)An increase in the expected inflation rate would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant.
B)A graph of the SML shows required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
C)If investors' risk attitudes change, the required rates of return on low-beta stocks will be impacted more than the required rates of return on high-beta stocks.
D)If investors became more averse to risk, then the slope of the SML would become less steep.
E)The market risk premium is lower for high-beta stocks than it is for low-beta stocks.

Question

Quizplus · Accepted Answer

An increase in the expected inflation rate generally leads to an increase in the required return on all risky assets by the same amount, assuming other factors remain constant. This is because inflation erodes the real value of returns, making investors demand higher nominal returns to compensate for the expected loss in purchasing power.

Which of the Following Statements About the Risk-Return Relationship Observed