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 the above

Question

Quizplus · Accepted Answer

The expected future inflation rate affects the nominal required rate of return for securities, which in turn affects the security market line. An increase in the expected future inflation rate will increase the nominal required rate of return for securities, and as a result, the security market line will shift upward by the same amount as the increase in the expected inflation rate.

An Increase in the Expected Future Inflation Rate Has the Effect