1. Assume that you expect the economy's rate of inflation to be 3 percent, giving an RFR of 6 percent and a market return ( R M ) of 12 percent.
2. Draw the SML under these assumptions.
3. Subsequently, you expect the rate of inflation to increase from 3 percent to 6 percent.
What effect would this have on the RFR and the R M ?
4. Draw another SML on the graph from Part a.
5. Draw an SML on the same graph to reflect an RFR of 9 percent and an R M of 17 percent. How does this SML differ from that derived in Part b? Explain what has transpired.