To mitigate the negative effects of Covid-19 episode on the U.S. economy, the Federal Reserve Bank (US Central Bank) lowered the federal fund interest rate which also led to lower risk-free rate. What effect this reduction in risk-free rate would likely have on the returns demanded by investors on stocks of all industries according to the predictions of CAPM as shown in Figure 6-10?

FIGURE 6-10 Shift in the SML Caused by an Increase in the Risk-Free Rate Required Rate of Return (%) SML2 = 8% + 5%(b;) SML1 = 6% + 5%(b;) rm2 = 13 - - - mi = 11 - - FRF2 = 8 1 Increase in Risk-Free Interest Rate TRF1 = 6 0 0.5 1.0 1.5 2.0 Risk, b; FIGURE 6-10 Shift in the SML Caused by an Increase in the Risk-Free Rate Required Rate of Return (%) SML2 = 8% + 5%(b;) SML1 = 6% + 5%(b;) rm2 = 13 - - - mi = 11 - - FRF2 = 8 1 Increase in Risk-Free Interest Rate TRF1 = 6 0 0.5 1.0 1.5 2.0 Risk, b