All other things being equal, what is the major impact that an increase in the expected inflation rate would be expected to have on the security market line?
A)reduce its slope
B)shift it down and to the right
C)shift it up and to the left
D)reduce required returns for investors in any individual asset

Question

Quizplus · Accepted Answer

An increase in the expected inflation rate would lead to an increase in the risk-free rate of return, which is the y-axis intercept of the security market line. The increase in the risk-free rate would shift the line up and to the left, indicating that investors would require a higher return for a given level of risk. This shift would indicate that the market is anticipating higher inflation and adjusting its expectations for returns accordingly.

All Other Things Being Equal, What Is the Major Impact