Assume that you expect the economy's rate of inflation to be 3 percent, giving an RFR of 6 percent and a market return (Rm) of 12 percent. Draw the SML under these assumptions. Hint: using CAPM, you can assume beta=0, and beta=1 to get the two points. Subsequently, you expect the rate of inflation to increase from 3 percent to 6 percent. Draw another SML on the graph from Part a. RFR = INFLATION + PURE RATE 6= 3 + PURE RATE, so PURE RATE = 3% So the new RFR = 6+3=9% Draw an SML on the same graph to reflect an RFR of 9 percent and an RM of 17 percent