ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Change in Expected inflation
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Change in Beta
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Change in Investors’ risk aversion
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Change in Coefficient of Variation
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Detailed explanation-1: -A security or a portfolio with a value of beta equal to zero has its expected return the same as the risk-free rate of return. Market risk premium determines the slope of the security market line. The slope gets steeper with the increasing value of market risk premium.
Detailed explanation-2: -The slope of SML, i.e., market risk premium. read more and the beta coefficient, can vary with time. Macroeconomic changes like GDP growth, inflation, interest rates, unemployment, etc., can change the SML.
Detailed explanation-3: -Any change in the risk profile of an asset that signifies a change in that investment’s primary risk factors or its market risk (beta), will cause a movement along the SML.
Detailed explanation-4: -The slope of the security market line (SML) is the reward-to-risk ratio, which equals the difference between the expected market return and risk-free rate (rf) divided by the beta of the market.
Detailed explanation-5: -What happens to the SML graph when risk aversion increases or decreases? The steeper the slopes of the line, the more the average investor requires as compensation for bearing risk. The market risk premium would rise, causing the required rate of return on a portfolio to increase by the same amount.