An increase in the expected future inflation rate has the effect of .
A)increasing the slope of the security market line
B)shifting the security market line upward by the amount of the expected increase in inflation
C)increasing systematic risk
D)none of these

Question

Quizplus · Accepted Answer

An increase in the expected future inflation rate will cause an upward shift in the security market line, as investors demand a higher return to compensate for the expected loss in purchasing power due to inflation. This shift represents an increase in the required return for all levels of systematic risk. Therefore, choice B is the correct answer. Option A is incorrect because an increase in inflation does not change the volatility of individual securities relative to the market, but instead changes the market’s required rate of return. Option C is incorrect because an increase in expected inflation does not necessarily increase systematic risk, which is the risk inherent in the broader market or economy. Option D is incorrect because choice B is the correct answer.

An Increase in the Expected Future Inflation Rate Has the Effect