Suppose the expected rate of inflation declines by 20 per, Finance Basics

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Suppose the expected rate of inflation declines by 20 per

Question: Assume the risk-free rate is 3.0% and the required return on the market portfolio is 12.0%.

(i) Suppose the expected rate of inflation declines by 2.0% per year. Write the new equation for the Security Market Line.

(ii) Show how the graph of the SML would be affected by this change?

(iii) Under these new conditions, what is the required return on a stock with a beta of 2.0?

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