Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows:
A. The y-axis intercept would decline, and the slope would increase.
B. The x-axis intercept would decline, and the slope would increase.
C. The y-axis intercept would increase, and the slope would decline.
D. The SML would be affected only if betas changed.
E. Both the y-axis intercept and the slope would increase, leading to higher required returns.
Answer: A
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