Use the letter in front of the statement to answer the questions that follow.Read all the options first.The letter may be used to answer more than one question.

A.It increases by 2%

B.It decreases by 2%

C.It increases, but not proportionately

D.It decreases, but not proportionately

E.No changes, remains the same

F.The SML shifts up, but the slope remains the same

G.The SML shifts down, but the slop remains the same

H.The SML pivots up, slope is steeper

I.The SML pivots down, slope is flatter

One-half point each

ASSUME THAT INFLATION IS EXPECTED TO INCREASE BY 2% THIS YEAR

1._____WHAT WOULD HAPPEN TO THE RISK FREE RATE, r_RF

2._____WHAT WOULD HAPPEN TO THE MARKET RATE, r_m

3._____WHAT WOULD HAPPEN TO THE REQUIRED RATE, r

4._____WHAT WOULD HAPPEN TO THE SLOPE OF THE SML

NOW ASSUME THAT INFLATION WILL NOT CHANGE, BUT, INSTEAD, INVESTORS BECOME MORE AVERSE TO RISK, UNEASY, NOT CONFIDENT IN THE MARKET, REQUIRING AN ADDITIONAL 2% ON THEIR INVESTMENTS.

5._____WHAT WOULD HAPPEN TO THE RISK FREE RATE, r_RF

6._____WHAT WOULD HAPPEN TO THE MARKET RATE, r_m

7._____WHAT WOULD HAPPEN TO THE REQUIRED RATE, r

8._____WHAT WOULD HAPPEN TO THE SLOPE OF THE SML