If the price of money (e.g., interest rates and equity capital costs)increases due to an increase in anticipated inflation, the risk-free rate will also increase.If there is no change in investors' risk aversion, then the market risk premium (rM - rRF)will remain constant.Also, if there is no change in stocks' betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

Question

Quizplus · Accepted Answer

This is because the CAPM formula states that the required rate of return on a stock is equal to the risk-free rate plus the market risk premium adjusted for the stock's beta. If the risk-free rate increases, then the required rate of return on each stock will also increase by the same amount, assuming no change in other factors such as the market risk premium and the stock's beta.

If the Price of Money (E