Which of the following statements is correct?
A) A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
B) The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
C) If investors become more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
D) An increase in expected inflation, combined with a constant REAL risk-free rate and a constant market risk premium, would lead to identical increases in the required return on a riskless asset and on an average stock, other things held constant.

Question

Quizplus · Accepted Answer

An increase in expected inflation would increase the nominal risk-free rate, which would lead to an identical increase in the required return on both a riskless asset and an average stock, assuming the real risk-free rate and market risk premium remain constant.

Which of the Following Statements Is Correct