Assume that you expect the economy$$s rate of inflation to be $4$ percent, giving an RFR of $8$ percent and a market return $($RM$)$ of $12$ percent.

Choose the correct SML graph under these assumptions.

The correct graph is $.$

A$.$

Security market Line

D$.$

Security market Line

C$.$

Security market LineB.

Security market Line

C$.$

Security market Line

Subsequently, you expect the rate of inflation to increase from $4$ percent to $5$ percent. What effect would this have on the RFR and the RM$?$

A change in risk$-$free rate, with other things being equal, would result in a new SMLb$,$ which would intercept with the axis at the new risk$-$free rate and be parallel to the original SMLa.

Choose the correct SML graph.

The correct graph is $.$

A$.$

B$.$

C$.$

D$.$

Choose an SML on the same graph to reflect an RFR of $9$ percent and an RM of $17$ percent.

The correct graph is $.$

A$.$

B$.$

C$.$

D$.$

How does this SML differ from that derived in Part b$?$ Round your answer to two decimal places.

New SMLc will have an intercept at and a slope so it be parallel to SMLa.