Other things held constant,in which way would the Security Market Line shift if the expected inflation rate decreases and investors also become more risk averse?
A)It would shift down and have a steeper slope.
B)It would shift up and have a less steep slope.
C)It would shift up and keep the same slope.
D)It would shift down and keep the same slope.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) represents the expected return of a security or portfolio in relation to its risk (beta). If the expected inflation rate decreases, the risk-free rate, which is part of the SML equation, would likely decrease, causing the SML to shift down because the expected return for any given level of risk would be lower. If investors become more risk-averse, they would require a higher return for taking on additional risk, which would steepen the slope of the SML, as the premium for bearing risk increases.

Other Things Held Constant,in Which Way Would the Security Market