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 (r_M - r_R_F)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

The statement correctly describes the relationship between inflation, interest rates, and equity capital costs, and how it affects the risk-free rate and the market risk premium. It also correctly states that if there is no change in investors' risk aversion and stocks' betas, the required rate of return on each stock will increase by the same amount as the increase in expected inflation.

If the Price of Money (E