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When the Fed lowers the discount rate, what will happen to your SML and the CML...

When the Fed lowers the discount rate, what will happen to your SML and the CML respectively?
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Answer #1

When Fed lowers the discounts the Required return on equity under SML and CMl will decrease . .

SML = y=mx+c ( where C is the Rf(fed rate ) and x=market return and m=Beta ) . SML and CML both are based on CAPM model : Re = Rf + (Rm-Rf)

When fed rate will lower the discount then the Market risk premium will increase and where Beta of the oinvestment is >1 then the Overall Re will increase , Whereas when Beta of the stock is <1 , then Re will decrease .

Effect on CML -

The proportion of Risky asset will increase as against Risk Free Asset ( Fed rate governed ) as only then one can acheive the Re .  

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