Which of the following statements is most correct? Normally, the Security Market Line has an upward slope. However, at one of those unusual times when the yield curve on bonds is downward sloping, the SML will also have a downward slope. The market risk premium, as it is used in the CAPM theory, is equal to the return on an average stock minus the required rate of return on an average companys bonds. If the marginal investors aversion to risk decreases, then the slope of the yield curve would, other things held constant, tend to increase. If expectations for inflation also increased at the same time risk aversion was decreasing say the expected inflation rate rose from 5% to 8% - the net effect could possibly result in a parallel upward shift in the SML. According to the text, it is theoretically possible to combine two stocks, each of which would be quite risky if held as your only asset, and to form a 2 stock portfolio that is riskless. However, the stocks would have to have a correlation coefficient of expected future returns of 1.0, and it is hard to find such stocks in the real world. Each of the above statements is false. 13