How does inflation change affect a firm’s security market line (SML)? How does investors risk aversion...

How does inflation change affect a firm’s security market line (SML)? How does investors risk aversion change affect a firm’s security market line (SML)?

Expert Solution

Impact on Inflation change on Firms Security Market Line( SML)

The SML ie. Security market line represents graphically the CAPM model that plots required rate of return and the risk on the y and x axis respectively and the risk free rate reffered to government securities by adding real inflation free rate and Inflation premium ie r* + IP so therefore increase in inflation premium will shift the SML upward and due to increase in inflation the risk free rate increases and this inturn will increase rate of return.

Impact on change in Investors Risk Aversion on Firms Security Market Line( SML)

The steeper the slope of the SML curve becomes higher is the investors risk aversion because the more and more investor would expect to be compensated for bearing the risk and If the investor has least or zero risk bearing power that implies no risk premium and therrefore no change in Security market line and it's flat and horizontal.

jeff jeffy answered 1 year ago

You find an asset that does not lie on the security market line (SML). Is there...

You find an asset that does not lie on the security market line (SML). Is there an arbitrage opportunity? Explain, with reference to Arbitrage Pricing Theory.

The security market line (SML) is an equation that shows the relationship between risk as measured...

The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: If a stock's expected return plots on or above the SML, then the stock's return is (-Select- insufficient, sufficient) to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is (-Select- insufficient, sufficient) to compensate the investor for...

The CAPM’s Security Market Line (SML) equation examines the relationship between a security’s market risk and...

The CAPM’s Security Market Line (SML) equation examines the relationship between a security’s market risk and its required rate-of-return. Explain the importance of this relationship from a Finance Management perspective. Explain how market perceptions of risk affect the required rate of return on investment. Explain with examples.

Draw the Security Market Line (SML) and plot Asset C such that it has less risk...

Draw the Security Market Line (SML) and plot Asset C such that it has less risk than the market but plots above the SML, and Asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio and risk-free returns are on your graph and provide the formula and the slope of the SML.) Explain how Assets C or D can plot as they do and explain why...

The Security Market Line (SML) provides the relationship between risk and required rate of return. Which...

The Security Market Line (SML) provides the relationship between risk and required rate of return. Which of the following statements about the SML is most correct? A The relevant risk is portfolio risk, which is measured by beta. B The relevant risk is total risk, which is measured by standard deviation. C The relevant risk is mutual risk, which is measured by coefficient of variation. D The SML is an equation, but it cannot be graphed. E The SML is...

what are the differences between the Capital Allocation Line (CAL) and Security Market Line (SML)? How...

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Using the properties of the capital market line (CML) and the security market line (SML), determine...

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Please describe the Security Market Line (SML). Assets or portfolios that have risk-adjusted returns that are different...

Please describe the Security Market Line (SML). Assets or portfolios that have risk-adjusted returns that are different from those on the SML will converge on the SML? Why? Please give two examples.

1. Explain how you would use the Security Market Line (SML) to discern the breadth of...

1. Explain how you would use the Security Market Line (SML) to discern the breadth of a portfolio’s individual stock winners vs. losers. 2. Explain how the link between price (P) and intrinsic value (V) are viewed by proponents of the Efficient Market Hypothesis and by those who are not proponents.

The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp.

Changes to the security market lineThe following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows:00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)Return on HC's StockCAPM ElementsValueRisk-free rate (rRFrRF) Market risk premium (RPMRPM) Happy Corp. stock’s beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk...

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