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 on an average stock,r_A = r_M,would increase.
• E) None of the indicated changes would be likely to occur.

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Definitions:

Emotions

Complex psychological states that involve a subjective experience, a physiological response, and a behavioral or expressive response.

Gray Matter

A component of the central nervous system consisting primarily of neuronal cell bodies, dendrites, and unmyelinated axons, involved in muscle control and sensory perception.

Spinal Cord

A long, thin, tubular structure made of nervous tissue, which extends from the medulla oblongata in the brainstem to the lumbar region in the vertebral column, conducting neural signals between the brain and the body.

Myelin

A fatty substance that surrounds the axons of many neurons, facilitating rapid signal transmission.