If Investors' Aversion to Risk Rose, Causing the Slope of the SML

question 78

True/False

If investors' aversion to risk rose, causing the slope of the SML to increase, this would have a greater impact on the required rate of return on equity, r_s, than on the interest rate on long-term debt, r_d, for most firms.Other things held constant, this would lead to an increase in the use of debt and a decrease in the use of equity.However, other things would not stay constant if firms used a lot more debt, as that would increase the riskiness of both debt and equity and thus limit the shift toward debt.

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Definitions:

Psychoanalytic Theories

A set of theories which focus on the unconscious motivations that shape personality and behavior, originally developed by Sigmund Freud.

Biological Theories

Concepts that explain phenomena or behavior strictly in terms of biological processes and heredity.

John Watson

An American psychologist and one of the founders of behaviorism, known for his theory that human behavior can be studied and modified through conditioning.

Hypnosis

A trance-like state of focused attention, reduced peripheral awareness, and an enhanced capacity to respond to suggestion, used for therapeutic purposes.