The SML helps determine the risk-aversion level among investors. The flatter the slope of the SMC, the the level of risk aversion. Which of the following statements best describes a shift in the SML caused by increased risk aversion? O The risk-free rate will increase. O The risk-free rate will decrease. O The risk-free rate will remain constant.

The flatter the slope of the SMC, the lower the level of risk aversion and a shift in the SML casued by increased risk aversion will cause the risk-free rate to decrease.

Explanation:

The Security Market Line (SML) can help to determine whether an investment product would offer a favorable expected return compared to its level of risk.

As an investment in a company's common stock becomes more risky for shareholders, Asset A will change its position on the SML

Any change in the risk profile of an asset that signifies a change in that investment's primary risk factors or its market risk will cause a movement along the SML.

For example, the real interest rate in the economy might change; inflation may pick up or slow down; or a recession can occur and investors become generally more risk-averse.

However, a shift in the SML casued by increased risk aversion will cause the risk-free rate to decrease.

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