can someone describe the effect and gryations of SML, (a shift vs rotation)? Inflation Risk averse investors increase Risky investors increase Money supply increase Interest rates are cut any other fact you think is important
To my knowledge… Inflation: Shifts the SML up because of higher expected returns for all securities to make up for the inflation. Risk averse investors increase: SML becomes steeper because more investors seek less risky investments and would require greater return for risker investments. Risky investors increase: should be the opposite as the previous example so the SML should be less steep because there are more “risk seeking” investors that do not require as high of a return to compensate for thier risk. Money supply increase: If you look at this as higher inflation, should be a vertical shift as mentioned above. If you look at it as a lower risk free rate, the SML should become steeper. I am assuming that it would be a combination of the above, but given a question on an exam I would say it would steepen the SML. Interest rates are cut: Should lower RFR, this steeper SML
The main way that I think of this is to visualize the CAPM pieces and see which part that those variables would affect.