Final answer:
If investors become more risk-averse, the SML will have a steeper slope and stock prices will fall.(option d) A rise in the supply of funds will cause interest rates to decline, while a rise in demand will increase the quantity of loans made and received.
Step-by-step explanation:
If all investors become more risk-averse, the Security Market Line (SML) will have the same intercept with a steeper slope; and stock prices will fall. This occurs because when investors are more risk-averse, they require a higher rate of return for any given level of risk, which is represented by a steeper SML. As a result, the cost of equity increases, leading to a decrease in the present value of future cash flows and subsequently lower stock prices.
Regarding the changes in the financial market, a rise in supply of funds will lead to a decline in interest rates because more funds are available for lending, which increases competition among lenders and pushes down the price of lending (the interest rate). Conversely, a rise in demand for funds will lead to an increase in the quantity of loans made and received as more borrowers are seeking to take out loans.