CFA Practice Question

CFA Practice Question

Assume that inflation is expected to increase by 1% and the market risk premium increases by 0.5%. Which of the following statements is TRUE?
A. The security market line will shift up by 1% and will also become steeper, with its slope increasing by 0.5%.
B. The security market line will become flatter, with the slope declining by 0.5%.
C. The security market line will shift up by 1% and will also become flatter, with the slope declining by 0.5%.
Explanation: The intercept of the security market line equals the nominal risk-free rate, and its slope equals the market risk premium. In this case both have increased. Thus, the intercept will increase by 1% (the line will shift up) and the slope will increase by 0.5% (the line will become steeper).

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