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_RF) 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 statement is true. When the price of money increases due to an increase in anticipated inflation, the risk-free rate will increase. If risk aversion among investors remains constant and there is no change in stocks' betas, then the market risk premium will remain constant and the required rate of return on each stock as measured by CAPM will increase by the same amount as the increase in expected inflation.

If the Price of Money (E