Which of the following in the context of SML best characterizes the relationship between risk and required rate of return: a) a parallel shift in the SML occurs in response to a change in attitudes of investors toward risk b) a movement along the curve shows a change in the risk characteristics of a specific investment, such as change in the business or financial risk c) the slope of SML indicated risk per unit of return for a given individual investor d) a change in the slope reflects a change in market conditions, such as ease of tightness of monetary policy or a change in the expected rate of inflation
B
cool. I was hoping for a bit of a discussion though would you mind going over the answers one by one? thnx
I hope my reasoning is good.I’ll give it a try a) a parallel shift in the SML occurs in response to a change in attitudes of investors toward risk The change in attitude makes the investor change prespective on how much has to be rewarded for taking the risk- he might think he is not compensated enough or be happy with a smaller rate- change in slope not shift b) a movement along the curve shows a change in the risk characteristics of a specific investment, such as change in the business or financial risk a movement along the curve shows the fact that a SPECIFIC investment needs to be rewarded more or less depending on how the risk of the business has changed - this is really an adjustment the investor makes c) the slope of SML indicated risk per unit of return for a given individual investor the sml shows the risk return of investments -not related to individual investors d) a change in the slope reflects a change in market conditions, such as ease of tightness of monetary policy or a change in the expected rate of inflation a change in monetary policy,inflation would change RFR too therefore a shift of curve not a change in slope- all investments are readjusted to the new market conditions
thanks a lot, florinpop.