The Security Market Line (SML)relates Risk to Return,for a Given

question 49

Multiple Choice

The Security Market Line (SML) relates risk to return,for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase,which of the following changes would be most likely to occur?

• A) The market risk premium would increase.
• B) Beta would increase.
• C) The slope of the SML would increase.
• D) The required return of an average stock, r_A = r_M, would increase.
• E) None of the indicated changes would be likely to occur.

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