The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?
A)The market risk premium will increase.
B)The beta of a stock will increase.
C)The slope of the SML will become steeper.
D)The standard deviation of a stock will increase.
E)The required returns on all stocks will increase.

Question

Quizplus · Accepted Answer

If investors conclude that the inflation rate is going to increase, they will demand a higher return on their investments to compensate for the decrease in purchasing power caused by inflation. This will result in an increase in the required returns on all stocks. The other options are not necessarily affected by inflation directly.

The Security Market Line (SML) Relates the Risks of Individual