Use the letter in front of the statement to answer the questions that follow. Re

Question

Use the letter in front of the statement to answer the questions that follow. Read all the options first. The letter may be used to answer more than one question. A. It increases by 3% B. It decreases by 3% C. It increases, but not proportionately D. It decreases, but not proportionately E. No change, remains the same F. The SML shifts upward, but the slope remains constant G. The SML shifts downward, but the slope remains constant H. The SML pivots upward, and the slope becomes steeper I. The SML pivots downward, and the slope becomes flatter ASSUME THAT INFLATION IS EXPECTED TO INCREASE BY 3% THIS YEAR. 1. What would happen to the risk free rate, r_rf 2. What would happen to the market rate, r_m 3. What would happen to the required rate, r 4. What would happen to the slope of the SML NOWASSUME THAT INFLATION WIL NOT INCREASE, BUT INVESTORS BECOME MORE AVERSE TO RISK, THUS REQUIRING AN ADDITIONAL 3% RETURN ON THEIR INVESTMENTS. 5. What would happen to the risk free rate, r_rf 6. What would happen to the market rate, r_m 7. What would happen to the required rate, r 8. What would happen to the slope of the SML

Explanation / Answer

1. If the Inflation is increased by 3% this year, then the risk free rate will increase by 3%

2) If the Inflation is increased by 3% this year, then the market free rate will increase by 3%

3) If the Inflation is increased by 3% this year, then the required rate will increase but not proportionately

4) If the Inflation is increased by 3% this year, then the SML will shift upward but the slope remains constant.

5) The Risk free rate will not change, it will be same

6) The market rate will not change, it will be same

7) The required rate will increase by 3%

8) The SML pivots upward and slope become steeper

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.