Other things held constant, if the expected inflation rate decreases at the same time investors become more risk averse, the Security Market Line (SML) would shift _____.
A)down and have a steeper slope
B)up and have a less steep slope
C)up and keep the same slope
D)down and keep the same slope
E)down and have a less steep slope

Question

Other things held constant, if the expected inflation rate decreases at the same time investors become more risk averse, the Security Market Line (SML) would shift _____. 
A)down and have a steeper slope
B)up and have a less steep slope
C)up and keep the same slope
D)down and keep the same slope
E)down and have a less steep slope

Quizplus · Accepted Answer

The Security Market Line (SML) represents the relationship between risk and expected return for all securities in the market. A decrease in the expected inflation rate would generally lead to lower required returns on investments, causing the SML to shift down. Additionally, if investors become more risk-averse, they would require a higher return for taking on additional risk, resulting in a steeper slope of the SML.

Other Things Held Constant, If the Expected Inflation Rate Decreases