Money & Finance · intro
What moves on the CAPM (Security Market Line) diagram
A higher risk-free rate shifts the entire SML up: required returns rise for every betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM., compressing valuations.
The SML anchors at the risk-free rate.
Central bank hikes lift that anchor, the whole line rises in parallel.
EVERY asset must now promise more. Prices fall across the board: that's how rate hikes hit stock markets.
Examiners ask this as: risk free rises sml, rates up valuations.
Other scenarios on CAPM (Security Market Line)