In the context of the security market line (SML), the expected (or required) return will decrease in the following situations EXCEPT:
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A. B. C. D.Explanation
If the capital markets tighten, the SML will shift upward in a parallel manner, resulting in a higher required return. If the capital markets loosen, the SML will shift downward in a parallel fashion, resulting in a decrease in expected return.
All other choices result in a downward shift in the SML. After the lawsuit is "won," investors would likely view a firm as less risky and would move down along the
SML to require a lower return. If economic growth decreases or if inflation decreases, the SML will shift downward in a parallel fashion. Investment growth opportunities are determined by the economy's long-term growth rate and factor into the real risk-free rate, which is a component of required return. When the growth rate decreases, investors who supply capital require a lower rate of return.