Assume That the Security Market Line (SML)is Based on a Risk

question 17

Multiple Choice

Assume that the Security Market Line (SML) is based on a risk free rate of 5% and a market rate of 11%. What will happen to the SML if the forecast of inflation increases and investors become more risk averse?

• A)The SML will shift down and have a steeper slope
• B)The SML will shift up and have a less steep slope
• C)The SML will shift down and have the same slope
• D)The SML will shift down and have a less steep slope
• E)The SML will shift up and have a steeper slope

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Definitions:

Military Goods

Products and materials used or consumed by the armed forces, such as weapons, equipment, and uniforms.

Civilian Goods

Products and services that are produced and intended for use by civilians rather than military or defense purposes.

Opportunity Cost

Opportunity cost represents the value of the next best alternative that must be foregone when making a decision, highlighting the trade-off between different choices.

Submarines

Underwater naval vessels capable of extensive underwater operations.