Which of the following is correct? (a) A change in the inherent risk of an inves

Question

Which of the following is correct? (a) A change in the inherent risk of an investment will cause a movement along the Security Market Line. (b) A change in investors' attitudes toward risk will cause a change in the market risk premium, and cause a change in the slope of the Security Market Line. (c) A change in the inherent risk of an investment will cause the Security Market Line to shift. (d) A change in expected real growth, capital market conditions or expected rate of inflation will cause a parallel shift of the Security Market Line.

Explanation / Answer

Answer to the Question is Option A, B and D are correct.

Security Market Line describes the relationship between Risk and return. Relationship are detailed below:

1. Movement along the SML >>A change in the inherent risk of an investment will cause a movement along the Security Market Line.

2. Change in the slope of SML >> A  change in investors' attitudes toward risk will cause a change in the market risk premium, and cause a change in the slope of the Security Market Line

3. Changes in Capital Market Conditions or Expected Inflation >>  A change in expected real growth, capital market conditions or expected rate of inflation will cause a parallel shift of the Security Market Line.

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