I’m lost, mathematically that doesn’t make sense. unless the increase in risk has a larger impact on the covariance portion of the SML
A is just opposite of D. The slope is required risk premium. So if your risk increases you need more return for a given risk. So SML becomes steep.
that explanation makes much more sense. I still can’t grasp the mathematics of it though.
A change in the slope of the line reflects investors attitute to risk, the risk premium.