Other things held constant, if the expected inflation rate decreases, and at the same time investors become more risk averse, the Security Market Line (SML) would shift _____.
A) down and have a steeper slope
B) up and have a less steep slope
C) up and keep the same slope
D) down and keep the same slope
E) down and have a less steep slope

Question

Quizplus · Accepted Answer

A decrease in the expected inflation rate would shift the SML down, while increased risk aversion would make the slope steeper.

Other Things Held Constant, If the Expected Inflation Rate Decreases