If investors expected inflation to increase in the future, the SML would shift up, but the slope would remain the same.

Question

Quizplus · Accepted Answer

If investors expected inflation to increase in the future, the required rate of return on investments would also increase, leading to a shift up in the SML. However, the slope of the SML is determined by the systematic risk of the market and would not change due to changes in inflation expectations.

If Investors Expected Inflation to Increase in the Future, the SML