In the capital asset pricing model, an increase in inflationary expectations will be reflected by
A) a parallel shift downward in the security market line.
B) an increase in the slope of the security market line.
C) a decrease in the slope of the security market line.
D) a parallel shift upward in the security market line.

Question

Quizplus · Accepted Answer

An increase in inflationary expectations shifts the entire security market line upward because investors demand a higher return to compensate for the expected inflation. This is represented by a parallel shift upward in the security market line.

In the Capital Asset Pricing Model, an Increase in Inflationary