(1) Suppose investors raised their inflation expectations by 3 percentage points over current estimates as reflected in...
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(1) Suppose investors raised their inflation expectations by 3 percentage points over current estimates as reflected in the 8% T-bill rate. What effect would higher inflation have on the SML and on the returns required on high- and low-risk securities? (2) Suppose instead that investors’ risk aversion increased enough to cause the market risk premium to increase by 3 percentage points. (Assume inflation remains constant.) What effect would this have on the SML and on returns of high- and low-risk securities?
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Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
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