If all investors become more risk averse, the SML will ________ and stock prices will ________.
A) shift upward; rise
B) shift downward; fall
C) have the same intercept with a steeper slope; fall
D) have the same intercept with a flatter slope; rise

Question

Quizplus · Accepted Answer

When investors become more risk-averse, they require a higher return for any given level of risk, which steepens the slope of the Security Market Line (SML). This reflects an increased price of risk. As a result, the required return on stocks increases, leading to a decrease in stock prices.

If All Investors Become More Risk Averse, the SML Will