The SML shifts:
A)indicate an acceptance of beta.
B)parallel to itself in response to changes in the risk-free rate.
C)and rotates around its horizontal intercept.
D)accommodates a decrease in the risk free rate.

Question

The SML shifts:
A)indicate an acceptance of beta.
B)parallel to itself in response to changes in the risk-free rate.
C)and rotates  around its horizontal intercept.
D)accommodates a decrease in the risk free rate.

Quizplus · Accepted Answer

The SML shifts parallel to itself in response to changes in the risk-free rate. This is because changes in the risk-free rate affect the expected return of all securities in the same way, leading to a parallel shift of the SML. The other choices are incorrect – the SML does not necessarily indicate an acceptance of beta, it does not rotate around its horizontal intercept, and it does not necessarily accommodate a decrease in the risk-free rate (rather, it simply shifts parallel to itself).

The SML Shifts