How would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse?

Question

Quizplus · Accepted Answer

When the expected inflation rate decreases, investors' required returns decrease. However, if investors become more risk averse, they will require a higher expected return for a given level of risk. This will cause the slope of the SML to increase. The y-axis intercept will decline because of the lower inflation rate, but the slope will increase, leading to a higher required return. Therefore, the best choice is E.

How Would the Security Market Line Be Affected, Other Things