The Security Market Line (SML)relates risk to return,for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase,which of the following changes would be most likely to occur? A) The market risk premium would increase. B) Beta would increase. C) The slope of the SML would increase. D) The required return on an average stock,r_A = r_M,would increase. E) None of the indicated changes would be likely to occur.

Question

Quizplus · Accepted Answer

If investors expect inflation to increase, the required return on an average stock would increase to compensate for the higher expected inflation, shifting the SML upwards.

The Security Market Line (SML)relates Risk to Return,for a Given