 # SML

1. Which of the following statements regarding the Security Market Line (SML) are correct? 1. The Beta parameter value is the degree of slope in the SML. 2. The Nominal Risk Free rate is the value of the intercept parameter. 3. An increase in systematic risk will increase the SML’s slope value. 4. A change in expected inflation is likely to cause a parallel shift in the SML. A. 1, 2, 3 B. 1, 2, 4 C. 1, 2, 3, 4 D. 3, 4 Can someone pls explain the reasoning…

A ? PS: I’m not sure if 1 is correct but according to me 2,3 are correct. With that said, I only have an option to choose A.

i say A as well whats the answer

The beta is the x axis value how can it be slope i pick D then

Isn’t the real risk free rate the intercept? I say D.

Ah, my BAD. I didn’t notice ‘NOMINAL’. I believe that Y-intercept is the REAL RISK-FREE RATE too. D ?

I know 4 is correct…but about in terms of option 3…I thought change is systematic risk (Beta) is a movement along the SML, so that wouldnt change the slope value. SA

D. Beta is the independent variable. Slope is determined by market risk premium. Equation is Rf + B(Rm - Rf) so Rf is the y intercept. Increase in systematic risk increases market risk premium Inflation effects risk free rate, so whole curve shifts up or down

sa.86 Wrote: ------------------------------------------------------- > I know 4 is correct…but about in terms of option > 3…I thought change is systematic risk (Beta) is a > movement along the SML, so that wouldnt change the > slope value. > > SA Change in beta (movement along curve) is change in an asset’s systematic risk. Slope measures the systematic risk of the market. That’s my understanding anyways

correct answer ic C

for 2 to be correct, 4 has to be correct. True that beta is an independent variable,but from r=rf+b(rm-rf), beta is the slope of the line. for 3, rm increases will the slop of SML. so 1,2,3,4 is correct. Nominal or real does not matter.